The remarkable level of austerity proposed in Britain’s new emergency budget made news around the world (see our earlier blog for details) as, in the wake of the Grecian debt crisis, the British coalition government declared deficit reduction their number one priority. If enacted, the emergency budget would reduce the nation’s budget deficit from 11 percent of GDP last fiscal year to 1.1 percent by 2015—a very dramatic reduction.
What would it look like if the U.S. adopted a similar budget policy in the coming years? In a recent paper, taxanalysts showed that over 10 years, the UK budget austerity package would translate to a $10.4 trillion U.S. deficit reduction package, with just over $2.5 trillion of that coming from tax increases and almost $8 trillion in non-health spending. Such a package would bring the U.S. debt-to-GDP ratio down to roughly 45 percent by 2020 (using CRFB's Realistic Baseline), which is only slightly above historical averages.
While the Administration is aiming to reduce the deficit by 2015 in a manner that would stabilize the debt-to-GDP ratio, Britain’s austerity budget would have their debt-to-GDP ratio steadily declining by that year. (Note: The Peterson-Pew Commission has called for stabilizing the debt-to-GDP ratio at 60 percent by 2018, and to decline thereafter.) Major spending cuts would include adjustments to the indexing of government payments for inflation and the freezing of all government salaries.
Considering that we are currently debating the extension of the Bush tax cuts—which would cost about $3.3 trillion under the President's proposal and about $4 trillion if all the tax cuts are extended (see our blog from Monday for more discussion)—it is clear that a package like Britain’s is about 10 steps ahead of the discussion here in the U.S. (and it’s highly controversial there as well). However, the time has come for us to enact our own fiscal plan that will slowly phase in changes as the economy recovers. Such a plan could actually strengthen the recovery now while eliminating the threat of a fiscal crisis down the road.