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Monday, August 23, 2010

THE ENGLISH LESSON

The most important English lesson for the Congress that convenes in January, 2011 will be centered on the phrase “cut spending”; as in “remove”, “eliminate” or “reduce”. Who better than to learn this lesson from than the English themselves. In fact the new British coalition government is taking bold steps to deal with an economic crisis which demands attention. The crisis, like the one currently imposed on the U.S. has two major elements: high unemployment and high government deficits along with all the usual long term negative implications such as higher yields i.e. debt service, on government debt and devaluation of currency resulting in inflation. The strategy is not without risks. Current high unemployment could be exacerbated by reductions in government spending. However, the current British government deficit sits at 11% of gross domestic product (GDP) or approximately $278 billion. By comparison, the U.S. deficit is forecast to be 9.16 % of GDP or $1.34 trillion for 2010. The British government will announce the specifics of major reductions in government spending in October but early estimates indicate that the multi-year budget balancing project will only rely on tax increases for 25% of the effort with government spending accounting for the other 75%. Public spending currently accounts for 51% of GDP. If the British National Health System and the national school system are not to face major cuts as current speculation holds, then the welfare system which eats up 28% of the entire budget, and defense spending are clearly on the block. Other government agencies could face cuts of from 20% to 33%.

It is a fact that Britain’s parliamentary system, even in the new two party coalition mode, makes it easier to implement harsh budget cuts than America’s two house, presidential system with it’s checks and balances and lack of party discipline. But the next Congress and the President should be watching Britain closely and follow it’s lead. If the Republicans increase their numbers significantly in the November elections or even take control of one or both houses, as some pollsters are predicting, they will have to demonstrate much more political courage than they have in the past if they want to live up to their own rhetoric and that of the anti-deficit voters who support them.

The huge gap between rhetoric and reality has already been made evident by the recent announcement by of U.S. Secretary of Defense Gates of his intention to disestablish a military command in Virginia. Gates wants to eliminate the Joint Forces Command in Norfolk. Established in 1999 as the successor to the Atlantic Command, its mission is to facilitate cooperation in war fighting and intelligence amongst the military services. It has grown, as all bureaucracies do, to require a budget of approximately $704 million a year and employs over 6,300 personnel, some 3,300 of whom are civilians. Gates wants to significantly reduce the number of civilian contractors across the military over the next few years. Simply put, the Joint Forces Command could not withstand a cost/benefit analysis by Gates and his staff.
Virginia’s congressional delegation, who are more concerned about local job loss than federal budget deficits and bloated Pentagon budgets are vowing to resist. This pattern of “cut, but not in my state or my donors or constituents, will affect all future attempts at deficit reduction and risks making any new Republican majority look hypocritical. Budget cuts entail real economic pain but historically, members of Congress have not been able to make the distinction between “desirable” expenditures and “necessary” expenditures. Every program, project or institution has a constituency that exaggerates its own importance or downplays the effect on the budget or deficit if it is eliminated or reduced in size.

The British people have rejected the “spend to prosperity” big government philosophy of the Labour Party which created the current crisis. British Prime Minister David Cameron, leader of the Conservative Party and Deputy Prime Minister Nick Clegg of the Liberal Democrat Party are willing to make the tough choices for the long term benefit of all British citizens. Hopefully, President Obama and the next Congress will learn the “English lesson".

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