U.K. Lesson: Austerity Leads to More Debt

Yesterday, I argued that U.S. fiscal policy is heading in the wrong direction, toward the economics of austerity. If you want to know where this path can lead, look across the Atlantic to poor old Blighty. For almost three years now, since the election of a Conservative-Liberal coalition, the British government has been slashing government programs and raising taxes, supposedly to reduce a big budget deficit. As I’ve written previously, the results have been pretty disastrous—both for ordinary Britons and for the public finances.

Just how disastrous was made clear yesterday by a new report from the Institute of Fiscal Studies, a London-based think tank that is widely regarded as independent and nonpartisan. In the “Green Budget,” its lengthy and detailed annual review of the U.K.’s finances, the I.F.S. pointed out that the budget deficit, far from being eliminated, was still so large that next year the Chancellor, George Osborne, will have to borrow about sixty-five billion pounds more than he had anticipated. (That’s about four per cent of the U.K.’s G.D.P.) Indeed, the hole in the public finances is so big, the I.F.S. said, that the government might well be forced to introduce a series of tax hikes following the next general election, which is expected to take place in 2015.

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