U.K. austerity a matter of political will

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By Hao Li | June 25, 2010 7:55 AM EST

The success and implementation of U.K.'s additional spending cuts and taxes hikes are largely a matter of political will, said Mortiz Kraemer, Standard and Poor's head of sovereign ratings for Europe.

Chancellor of the Exchequer George Osborne announced a plan Tuesday that would produce savings of 40-billion pounds per year by 2014/2015. Osborne also inherited a plan from the Labour government that would produce savings of 73-billion pounds per year to combine for total savings of 113-billion pounds.


According to projections from Britain's Office for Budget Responsibility (OBR), the cuts will produce a budget surplus of 0.3 percent excluding investment and reduce debt to 69.4 percent of GDP by 2014/2015.


Osborne's plan include 31.9-billion pounds in spending cuts: 11-billion pounds will be from welfare and 20.9-billion pounds from government departments, which will negatively impact the salaries of employees in those departments. Osborne also announced a two-year wage freeze for most government employees.


Speaking at a Bloomberg sovereign debt conference, Kraemer said that the success of implementing these measures will depend on the ability and willingness of the government to proceed in the face of popular opposition.


“At the end of the day, as in other countries, it's a question of political will,” said Kraemer.


Austerity measures, particularly those aimed at cutting benefits and wages, have been fiercely resisted by the public in some European countries, raising doubts over their political feasibility.


In Greece, for example, wage cuts were met with strikes that crippled entire industries and protests that degenerated into violent and even fatal social unrest.


Danielle Haralambous, U.K. economist at 4Cast Ltd. in London, said that she does not believe it is in the disposition of the U.K. public to erupt into social unrest over the proposed austerity measures.


Haralambous also thinks that the rhetoric and PR campaign of the U.K. government in explaining the merits, benefits, and necessity of the budget cuts should assuage public discontent.


She also pointed out that policies of leniency towards some of the poorest people may help public perception. For example, the lowest income families will actually receive 2 billion pounds more in Child Tax Credit.


In response to Osborne's new measures, the OBR cut the GDP growth forecast to 1.2 percent this year and 2.3 percent in 2011. This compares to last week's forecast of 1.3 percent for 2010 and 2.6 percent from 2011.


Commenting on the economic impact of the cuts, Kraemer remarked that the economic outlook will be clouded by it and that government spending cuts will take demand out of the economy.


The key question will be if the private economy can pick up the slack of the government, said Haralambous. She also added that the Bank of England's continued accommodative monetary policy should mitigate the effects of the fiscal tightening.

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