The UK's emergency budget is being seen as a clarion call that Europe will ignore pressure from Barack Obama, the US president, not to cut spending too far because it could damage the worldwide economic recovery.
On Tuesday, George Osborne, the chancellor of the exchequer, raised taxes by billions of pounds and announced measures predicted to lead to the loss of hundreds of thousands of public-sector jobs. In doing so, he sent a clear message that he believed doing nothing, or very little, to reduce the record deficit would result in a run on the pound, which would force interest rates up and leave the government owing even more.
Mr Osborne's tactics closely echoed those in Germany and flew in the face of Mr Obama's call for other Group of 20 (G20) developed and emerging economies, which are meeting in Toronto on Saturday and Sunday, to focus on bolstering growth rather than on debt reduction. "Nobody can seriously dispute that excessive public debts, not only in Europe, are one of the main causes of this crisis," Wolfgang Schaeuble, Germany's finance minister, said this week. "That's why they have to be reduced."
Mr Schaeuble insisted that, despite his own government's cuts, Germany was sticking to previous G20 commitments on fiscal stimulus. That, though, sounded like lip service given what has been happening throughout Europe. "This is getting ugly," Paul Krugman, the Nobel-winning economist, commented on his New York Times blog. "The US needs to be thinking about how to insulate itself from European masochism."
The newspaper itself commented in an editorial that "slashing budgets is the wrong thing to do" for most big economies right now. But "slashing" was just what happened in Britain on Tuesday. Mirroring the German chancellor Angela Merkel's strategy, Mr Osborne increased value-added-tax, ordered deep spending cuts and offered the lure of a phased reduction in corporation tax to 24 per cent, a record low.
The moves towards deficit reduction appeared sharply at odds with the June 16 call from Mr Obama urging fellow G20 leaders to focus on economic growth and to leave the re-ordering of public finances to the "medium term". "Our highest priority in Toronto must be to safeguard and strengthen the recovery," Mr Obama said, clearly worried about austerity programmes already introduced in Europe. However, a spokesman for David Cameron, the UK prime minister, said: "Different countries have different starting points, and for some countries, such as our own, there is a need to get on and tackle the deficit more quickly."
Mr Osborne reflected these sentiments in his budget, just as they had already been reflected in the actions of other governments across Europe. Ireland, which has the continent's largest deficit, embarked on an austerity campaign more than a year ago with tax increases, cuts in public-sector pay of up to 15 per cent and reductions in welfare benefits and health services. In Italy, a three-year freeze on public-sector wages, the replacement of only 20 per cent of workers who leave, and making cuts to city and regional budgets, have been deemed "not ambitious enough" by the IMF.
Meanwhile, in beleaguered Spain, only 10 per cent of most retiring public servants will be replaced. On top of this, civil service salaries are being cut by 5 per cent a year this year and frozen next. Greeks, whose deficit woes sparked the euro crisis and where wages and welfare benefits account for 75 per cent of government spending, are awkwardly embarking on a programme to reduce the public-sector workforce, freeze wages and raise retirement ages. VAT plus fuel and tobacco taxes are also on the way up.
Similarly, France has announced plans for spending cuts, closing tax loopholes and saving ?15 billion (Dh67.47bn) by ending temporary measures to stimulate the economy. Further afield, even Naoto Kan, Japan's new prime minister, is now setting targets to reduce national debt. business@thenational.ae
