The nature of UK austerity

Veronique de Rugy sums up many points I continue to be thinking:

When I looked at the data back in June, we saw that of the roughly £40 billion that was shaved from the deficit during the 2010–2011 budget cycle, for every £3 of new tax revenue, U.K. taxpayers got £1 in cuts — exactly the reverse of what was promised.

What’s more, the evidence indicates that U.K. has, at best, slowed down the growth of spending, but it has not engaged in actual spending cuts. I documented the trend in British spending earlier this year:

A look at the data in Her Majesty’s Fiscal Year 2012 Budget shows (see table 2.3) that total managed expenditures will increase from £696.4 billion in 2011–2012 to £733.5 billion in 2014–2015, and further to £756.3 billion in 2016–2017. Adjusted for population growth, this is slow growth, but not a savage cut. That table also shows a “projected” drop in Public Sector Gross Investment between 2012–2013, but if it ever materializes, it will be contained to that year alone.

Spending cuts in the UK can’t be blamed for the weak growth path the country is on. On the other hand, tax increases can. Here is a list:

a VAT hike from 17.5 percent to 20 percent (probably the main culprit of the U.K.’s current problems)
a new 50 percent tax bracket on incomes over £150,000, which will drop to 45 percent next year
an increase in air-passenger duty to 8 percent
“temporary” payroll tax of 50 percent on bonuses over £25,000
a capital-gains tax hike
a 0.088 percent levy on banks
an increase to 7 percent in the stamp duty on the sale of properties worth more than £2 million and on properties bought through “non-natural persons.”

(For more, go here.) The bottom line is that the U.K. is another case of private-sector austerity (i.e., tax hikes) without public-sector austerity (i.e., spending cuts).

For more detail, here is a new and very good paper by Anthony Evans.  Here are some interesting remarks from Nicholas Crafts.