Taxes & Spending

British Resolve and French Protests Show Contrasting Reactions to Fiscal Reality

The legacy of Winston Churchill-style British determination to overcome big challenges has been manifested through recent U.K.-government plans to cut its deficit sharply. In stark contrast, polls show that a majority of French people side with protestors who oppose spending cuts that include raising the minimum retirement age in that country from 60 to 62.

Germany and Austria also are undertaking budget-cutting actions, but neither is incurring the kind of public discord that is emerging in France. The differing reactions in Europe to steps aimed at instilling fiscal responsibility will likely emerge in the United States as difficult but needed budget trimming is enacted in the months ahead.

A midterm Congressional election that tilted the U.S. House in favor of Republicans could force bipartisan compromises on budget cuts. Popular U.S. tax breaks, such as deductions on mortgage interest, may be recommended for elimination by President Obama’s 18-member National Commission on Fiscal Responsibility and Reform, which faces a Dec. 1 deadline to issue its report.

Meanwhile, the coalition government that U.K. Prime Minister David Cameron and his Conservative Party formed in July appears to be focusing its agenda on economic growth and job creation. His new emphasis on job creation follows opposition Labour party claims that the government lacks plans for long-term growth.

France Approaches a Crossroads

If only a new spin to an existing policy might have as much of a chance of working in
France. French protestors seem intent on resisting fiscal austerity measures of any kind. As a result, France is approaching a crossroads that could determine whether it starts to adopt the fiscal discipline that its leaders want to impose or risks sinking into an ever-deepening financial crisis.

Conservative President Nicholas Sarkozy is seeking to curb state-pension spending, while a recent poll shows public support for sometimes violent protests that have led to fuel shortages around the country. The French Parliament approved the legislation lifting the nation’s retirement age from 60 to 62 on Oct. 27 and President Sarkozy is expected to sign it in the coming weeks. Nonetheless, violent protests could be launched again by citizens who oppose chipping away at their perceived government entitlements. Nevertheles, violent protests could be launched again by citizens who oppose chipping away at their perceived government entitlements.

The protestors’ disconnect between the country’s limited revenues and its unsustainable spending is shown in a recent poll taken by the BVA market-research organization. The poll found that 69% of respondents expressed support for protests against the government’s pension changes and that 52% of the French public even approved of public-transport strikes. Public unrest required the Oct. 22 deployment of riot police in Lyon, France’s third-largest city, to contain gangs of protesters, Agence France Presse reported.

Meanwhile, French Energy Minister Jean-Louis Borloo said the nation’s fuel supply is improving, despite as many as 40% of the service stations running short of fuel in October.

Germany’s Fiscal Discipline

In Germany, Bundesbank President Axel Weber’s criticized the European Central Bank’s handling of the euro-zone debt crisis and its purchases of euro-zone government debt. His outspokenness is said to be well-received in Germany, where the bailout of Greece’s fiscal deficit is unpopular. But his view clashes with certain other European central bankers. Rifts clearly remain among European countries in the wake of the Greek sovereign debt crisis.

Germany’s Weber is an advocate of fiscal discipline and self-reliance by national governments to avoid any need for German taxpayers or the European Central Bank to bail out spendthrift euro members. However, resistance from Southern European countries recently forced Germany to relax calls to penalize European Union member nations that violate the union’s fiscal rules.

Of course, the German policies may be worth adopting, if the country’s strengthening economy is an indication of their merit. Indeed, a business-climate index that measures the confidence of German companies rose in October to a 3½-year high, according to the Munich-based Ifo Institute.

Austerity in Austria

Austria’s government coalition parties announced on Oct. 23 that they have agreed to 2011 austerity measures. The Austrian budget would begin to scale back huge 2009 expenditures used to stimulate the economy and to stabilize the banking sector.

As a result, Austria’s 2012 deficit is projected to dip to 2.9% of gross domestic product (GDP) and to fall below a 3% GDP ceiling set by the European Union’s Stability and Growth Pact. That goal would be reached one year faster than previously projected. Extra taxes are expected to account for 40% of the austerity measures, while the other 60% would come from spending cuts.

So far, budget-related protests in the United States seem to have been limited largely to fiscally conservative Tea Party activists. If the kinds of hefty budget cuts European countries have started to adopt become implemented Stateside, it will bear watching closely whether Americans react more like the increasingly realistic British or the protest-admiring French.

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