Foreign Affairs

Europe Shifts Toward Fiscal Conservatism as America Spends Wildly

Europe, traditionally known for its generous social service programs that include state-sponsored pensions, increasingly is accepting fiscal conservatism as the U.S. government appears addicted to runaway deficit spending.

A recent example is the European Commission’s (EC) legislative proposal to tighten its control of the economic policies of European Union (EU) member states. A key part of the proposal is focused on preventing member countries from pursuing policies that could cause future debt crises such as the ones that engulfed Greece, Portugal and others earlier this year.

As the EU’s executive arm, the commission is seeking not only to monitor the public finances and macroeconomic conditions of member nations but to fine them if they fail to follow recommended actions, such as cutting government spending. The intent is to prevent EU nations from interfering with the commission’s enforcement of budget rules that call for their governments to hold budget deficits below 3% of annual gross domestic product (GDP) and total debt under 60% of GDP.

The proposal is a sign that European policymakers are serious about shrinking the large budget deficits of many EU member nations. Indeed, budget cuts only are expected to deepen throughout Europe next year, when Germany and a few other major EU governments are poised to take such measures.

In a potential bellwether development, U.K. Prime Minister David Cameron announced plans last Thursday to eliminate 192 independent government agencies to help the country trim its large deficit as part of a strategy to spur private-sector employment by using incentives. He unveiled further budget-cutting plans today aimed at regaining market confidence in government finances, and encouraging the private business to invest and to hire employees to drive economic growth.

U.K.-Style Conservatism

Cameron, the Conservative Party leader who heads a five-month-old U.K. coalition government, is a leader who is moving the United Kingdom toward becoming an aggressive deficit-cutter among the world’s major economies. After recently ending 13 years of Labour Party rule, the government accounts for 51.5% of the United Kingdom’s GDP, compared with about 41% in the United States and an average of more than 50.7% in the European Union.

Among its spending priorities, the U.K. government plans to focus on transportation infrastructure and training workers for new jobs to increase the country’s economic growth potential. The problem of “poor productivity” across the U.K. public sector must be addressed by significantly boosting the efficiency of the services it provides, according to the Confederation of British Industry, a U.K. business lobbying group.

Renewed U.K. fiscal responsibility contrasts dramatically to the United States, where politicians in recent years have increased spending significantly for new initiatives such as President Obama’s $814 federal stimulus program last year and a $700 million banking bailout at the end of the Bush Administration. Aside from the bailout, the U.S. federal 2010 budget rose by 9% to $3.5 trillion, according to the Congressional Budget Office, with an unemployment rate of close to 10% causing food stamp payments to rise 27% and unemployment benefits to jump 34%.

On Friday, the Obama Administration announced that the federal deficit for the just-completed 2010 fiscal year hit $1.3 trillion, barely short of the record $1.4 trillion federal deficit during the previous fiscal year. The deficit numbers reveal that the U.S. government needed to borrow a shocking 37 cents out of every dollar that it spent in fiscal year 2010.

The fiscal 2010 deficit stayed elevated due to the “severe economic recession, high unemployment, and the financial crisis,” Treasury Secretary Timothy Geithner and acting White House budget director Jeffrey Zients said in a joint statement Friday.

That unsustainable deficit-spending only is projected to continue throughout the rest of the decade. Forecasters expect the U.S. government debt to grow by $8.47 trillion during that period.

Economists Alarmed

Those deficits are alarming the National Association of Business Economics, which warned that excessive federal debt is the single-biggest threat to the U.S. economy. The soaring deficits are having a direct, negative impact on the GDP of the United States.

Real GDP growth in the United States this year now is expected to hit 2.6%, down from the 3.2% gain forecasted in May by the National Association of Business Economics. Most of the downward revision is due to worse-than-expected summer results and a dimmed economic outlook.

Without any change in U.S. government policies, the economics group forecasted that the federal deficit is projected to hit $1.2 trillion during fiscal 2011, which began October 1. However, the Obama Administration is projecting that the deficit for the 2011 budget year will climb to $1.4 trillion.

U.K. voters seem to have lost confidence in policies that expand government, inflate deficits and lack incentives to spur private sector economic growth. It will be interesting to watch whether American voters use the midterm congressional elections to let their voices be heard about the fiscal-management performance of American lawmakers who are facing re-election this November.

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