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Thatcher II? Britain poised to slash budgets, government’s role

LONDON — Rolling up its sleeves to grapple with a ballooning deficit, Britain’s new Tory-led government hinted at the steepest spending cuts in a generation today while launching a campaign of public consultation it hopes will dull the pain when cut

LONDON — Rolling up its sleeves to grapple with a ballooning deficit, Britain‘s new Tory-led government hinted at the steepest spending cuts in a generation today while launching a campaign of public consultation it hopes will dull the pain when cuts in government services kick in.

Prime Minister David Cameron’s government has been selling the current recession as a once-in-a-generation chance to reduce the role of government in British society and get control of an annual budget deficit that has grown to about 12 percent of gross domestic product — about four times the level that the European Union deems safe. The government has promised that spending cuts are being considered everywhere, from defense to schooling.

The hatchet man for Cameron’s budget cuts will be Chancellor of the Exchequer George Osborne, who told Parliament today that public input will be considered over the next two weeks before the government releases its so-called “emergency budget” on June 22, which will detail the plan.

“All parts of society will have a chance to have their voice heard,” Mr. Osborne said.

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One opposition wag dubbed this an “Axe-Factor” approach to spending cuts, playing off the X-Factor, a popular British talent show.

Whether Osborne’s team succeeds in a sales job for an austerity budget during a deep recession will be an indication of how much public support Cameron will be able to muster for his campaign to transform Britain, much as former Tory Prime Minister Margaret Thatcher did in the 1980s, when she sold off state-owned industries and slashed welfare spending.

His approach borrows heavily from Canada, which slashed its national debt from almost 70 percent of GDP to below 30 percent in a three-year period in the 1990s with a package of spending cuts and tax increases. The Conservative-dominated coalition is eager to emulate both the style, and success of Canada’s approach.

Spending star chamber

“They brought together the best people from inside and outside government to carry out a fundamental reassessment of the role of the state,” said Osborne, who also laid out plans to set up a so-called “star-chamber” of senior ministers and civil servants to whom ministers will have to justify their spending. “They [Canada] asked probing questions about every part of government spending. They engaged the public in the choices that had to be made and they took the whole country with them.”

Will the Canadian model work?

Worried onlookers point out that Canada in the 1990s had much healthier economic partners, while today much of the world is grappling with recession, too.

“One worry would be that Canada in the 1990s – while it was cutting public spending very aggressively – was able to benefit from extremely strong growth in its main export market, the US,” says Tony Dolphin, Chief Economist at the Institute of Public Policy Research, a left-leaning think tank. “Obviously, we have got our main export market in the doldrums at the moment and interest rates are already at half a percent. So we may not have the sort of monetary and external stimulus needed to offset the fiscal tightening.”

Dolphin explained that while there’s little room in the UK for further interest rate cuts, which typically stimulate economic growth, Canada began its crash program at a time of relatively higher interest rates, so was able to compensate for the negative economic impact of spending cuts with interest rate reductions.

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Most Britons accept that stringent cuts are on the way, and need to be made in one form or other, even if their consequences haven’t quite sunk in and the opposition Labour Party says the government could jeopardize Britain’s fragile recovery by wielding the axe too deeply and too soon.

“We know that bringing down the deficit is what needs to be done but there is a delicate balancing act in terms of timing,” says Simon Kirby, an economist at the National Institute of Economic and Social Research (NIESR), an independent body that produces influential forecasts for the UK economy.

For whom the ax falls

The axe has already fallen elsewhere in Europe.

Irish police and teachers have had to swallow pay cuts of 15 percent, Portugal has frozen public salaries, and France and Greece have raised the retirement age.

In Germany, a latest round of cuts have been introduced by the government while Spanish public sector workers took to the streets today in protest against an average 5 percent cut in pay that comes into effect this month.

After a Keynesian response to the initial financial crisis that saw a surge in government spending, Britain is now part of a wider European embrace of austerity, even if some say it still hasn’t yet gone far enough in the UK.

The credit ratings agency Fitch warned today that Britain’s rise in public debt ratios since 2008 has been faster than in any other AAA-rated country – the top credit rating a country can have. The country’s deficit is nearly twice as large as that seen during previous economic downturns in the 1970s and early 1990s.

Kirby cautions that “in all likelihood” Britain’s recovery will be a weak one, while “major risks” exist in the form of Europe’s difficulties.

“Economic growth will eventually accelerate in the UK but it will be painful before then. Unemployment will rise and will continue to rise until next year for example — even if it doesn’t reach 10 percent,” he says. “In the meantime, involving the public in a debate can only be a good thing. You need the population to be on board in order to do tackle the deficit and that is the approach they [the government] seem to be taking.”