Yesterday in Great Britain, the new Conservative government’s Chancellor of the Exchequer, George Osborne, announced a new austerity program that includes deep reductions in spending and a raft of tax hikes. The budget, which cuts everything from education to the military by an estimated 25 percent over five years, is the most ambitious of its kind since the days of Margaret Thatcher, who, through the use of shock-therapy revived the British economy from its decades-long slump. It also raises the value-added tax (VAT) 2.5 percent while increasing to 28 percent the amount of money investors will pay on capital gains.
In unveiling this new plan, the United Kingdom has become the face of the wave of austerity that is sweeping Europe and threatening that continent’s much-vaunted welfare state economic model. Awash in unpaid bills and the victims of capricious markets, many European governments have reached the conclusion that unfunded social spending is unsustainable and have responded by raising retirement ages, cutting benefits, and backing away from their commitment to a cradle-to-grave society.
The European debt crisis, which originated in Greece and has spread to many nations on the periphery of the Eurozone, threatens the world’s fragile economic recovery and it is comforting that the continent’s leaders have responded to the situation in earnest. However, it is their responsibility to ensure that the medicine isn’t worse than the disease and that in their bid to quell the markets they don’t plunge the world back into recession. In other words, they must walk a tightrope between austerity and stimulus; keeping the economy going through tax incentives and limiting the pain of spending cuts on average citizens, while slashing some of the excess and unfunded liabilities that threaten European bonds with junk status.
The long and winding road towards fiscal solvency will be bumpy and painful and will require sacrifice, but if the continent does not get in control of its finances it will be strangled by debt. The European Union and the economic model that its member states have adopted are worth preserving and sometimes to save something it must be shrunk.