UK Government Frames Its Own Austerity Plan

By: Dr. Mike Campbell

The UK is not part of the Eurozone and the chances of the subject of becoming a member being discussed in the lifetime of the current parliament are close to zero. However, the sovereign debt crisis is not restricted to Eurozone, or even European nations. Just about every developed economy has taken advantage of raising funds to support its short term plans through borrowing, much as a profligate teenager who has gone mad on credit card spending. Governments have always borrowed to fund longer-term projects, but what has changed with the advent of the financial crisis is that the magnitude and sustainability of such practices has been called into question, by the public, politicians and the rating agencies.

The new UK coalition government has inherited much of the current debt crisis from the outgoing labour party (not that John Major’s government handed Tony Blair a debt-free nation to run, of course), but the problem has been exacerbated by the need to stimulate the economy during the worst of the financial crisis.

The administration plans to reduce the structural deficit to zero by 2016 (honest) and has made a start on this by announcing that VAT (sales tax) will climb from 17.5 to 20% from January – this move is expected to raise £13bn. Public sector salaries above £21000 will be frozen for two years as will child benefits and certain tax credits. Many government departments will need to reduce expenditure by 25% from the current budget figures. Some measures intended to protect the poorest members of society and lower-paid families with children were also announced. Local governments will not be allowed to raise their charges for the provision of local services for the next two years. As with all austerity measures, these provisions are likely to be very unpopular, but it remains to be seen if they will trigger the strikes seen in other countries.