HAD George Bush had the time, he would have watched Gordon Brown’s budget speech with envy. In America, the president proposes, but Congress disposes; in Britain, the chancellor both proposes and disposes. In America it has become routine for Congress to say the president’s budget is DOA — dead on arrival; in Britain, the majority Labour party greets the chancellor’s every proposal with wild enthusiasm.
Procedural differences notwithstanding, there are important similarities. One is the attraction of off-balance-sheet financing. America’s budget-makers refuse to recognise the trillions of dollars of liabilities that are accumulating as the obligations to future pensioners outstrip the money being collected to meet them. Britain’s, meanwhile, argue that they need not record on the national balance sheet the debts being incurred by such operations as the national rail system.
Even without hiding these liabilities, both the British and American governments are spending more than they are taking in. In Britain, this is a result of spending increases so huge that they outstrip even the multiple tax rises Gordon Brown has imposed. In America, the red ink is due to the combination of Bush’s tax cuts, the inability of Congress and the president to contain domestic spending, and higher spending on the military and homeland security.
In both countries the red ink has been justified as being a sensible response to the need of their economies for a fiscal stimulus in the face of a world slowdown. We are all Keynesians now, it seems. In both countries, the red ink continues to flow, even though the British economy is growing at an annual rate of about 3%-3.5%, and America’s at somewhere between 4% and 5%, well past the points where stimulus is needed.
In both countries there are plans to staunch or eliminate the flow — without raising taxes. Bush would halve the deficit in five years by containing domestic spending and hoping that his supply-side tax cuts will generate higher revenues. Brown is predicting that the current deficit will disappear in the 2006-7 fiscal year and the red ink will turn to black the following year. But public-sector net investment will rise, justifying in the chancellor’s mind borrowing of £27 billion even in 2006-7, a policy that he finds untroubling since borrowing to fund investment, as he defines that term, has always been a centrepiece of his policy.
Both my president and your chancellor seem more optimistic than prudence would dictate. The president knows full well that Congress won’t hold the line on domestic spending, that Iraq will prove more costly than he has budgeted for, that he has made inadequate provision for the rising cost of meeting obligations to retiring baby boomers, and that the Medicare system will need more cash. Red ink is in America’s future barring some post-election epiphany for Bush, in which it is revealed to him that tax cuts are not completely self-financing, as extremist supply-siders are fond of claiming, and that Congress will insist on more, rather than less, social and infrastructure spending. Senator John Kerry, who has promised more increases in spending than can be financed by his plans to soak the rich, would probably exacerbate the problem.
Brown’s optimism that the deficit will come down is unaffected by the fact that he remains firmly committed to ending child poverty (something akin to Bush’s “no child left behind” educational programme), funding a resurgence of scientific discoveries (Bush has the more specific target of putting a man on Mars) and continuing to redistribute income from the rich to the poor. He says he won’t need new taxes because Treasury receipts will grow faster than the economy — even though the trend has been in the opposite direction in recent years. If Brown is wrong in forecasting that profits of financial companies are due to soar, along with the bonuses they pay their brokers and bankers, he will be hard-pressed to keep to his fiscal rules.
It is the presence of those rules, which guide and ultimately limit the chancellor’s room for manoeuvre, that is one of the principal distinctions between British and American fiscal policy. In America, there doesn’t seem to be any such coherent fiscal-policy framework. Brown will borrow only for investment; Bush will borrow to cover operating costs. The chancellor has increased spending, he says, to make up for years of neglect of the public services; when the period of catch-up ends, so will the rapid real increases in outlays. Bush has yet to confront the greater social spending that the retirement of the baby boomers will require. And because the American deficit is much larger than Britain’s as a percentage of GDP (5% against 3%), and America’s accumulated debt much larger than Britain’s relative to GDP (50% against 33%), Bush has less room to play catch-up when the day arrives that he (or his successor) must.
That’s the good news for Britain. The good news for Americans is that their government claims a lower portion of the nation’s output than does Britain’s (35.7% against a planned 42+%), leaving taxpayers with more of their own money. At some point Britain should begin to heed FA Hayek’s warning that once the state “exceeds a certain portion of the whole . . . the effects of its decisions on the remaining parts of the economic system become so great that indirectly it controls almost everything.”
Americans benefit, too, from far lower marginal tax rates, providing us with a greater incentive to work and take risks, and less incentive to look to government to cure all our ills. Finally, because of the checks and balances built into the American system, US taxpayers are spared the endless changes that result from the chancellor’s tinkering, recently at the expense of the small businesses to which he professes to look as a source of growth and innovation.
In the end, the American and British systems differ widely, not least because the British people have been trained to want their government to do more for them, and the American people to look more to their own talents and resources. But both models seem to be delivering rising prosperity, while the European model delivers lower growth and higher unemployment. It may be that the Europeans have passed Hayek’s threshold, one that Britain is only approaching and that America is nowhere near.
Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute
