Daily Austerity Watch: The U.K.’s Austerity Crisis

That great economic sage Mary Poppins memorably sang that it “takes a spoonful of sugar to make the medicine go down.”  Residents of the fictional nanny’s homeland, the United Kingdom, will need a lot more than that the digest the government’s controversial austerity policy.

Voters head to the polls for local and regional elections and media reports argue that the Liberal Democrats — who govern in a coalition government with the ruling Conservative Party — will lose badly.    If the vote causes the coalition to break, investors may worry that the U.K. austerity policies, which seek to realize 111 billion pounds by 2015,  may be imperil.   Given what’s going on in more cash-strapped countries in Europe such as Ireland, Greece and Portugal, that’s a healthy fear.

Meanwhile, unions are vowing a fight.  Thousands of activists crowded into London’s Trafalgar Square to protest the government’s policy, which among other things will trim  500,000 public sector jobs and slash social benefits to millions of Britons along with raising some taxes.  Though their power has diminished,  U.K. unions still wield considerable political clout.   U.K. union membership stands at 6.6 million.

Mark Serwotka, the general secretary of the Public and Commercial Services Union, told The Telegraph that he thought the cuts were unfair and uncessary.

“Barely a year in, this Government has sparked a wave of popular anger against its ideological plan to blame and punish us for an economic crisis caused by greed and recklessness in the financial sector,” he told the paper.

Like their U.S. counterparts, officials in the U.K. argue that they had little other choice but to undertake a major austerity program to put the country’s fiscal house in order.  Indeed, the country continues to slog its way out of the recession.

The unemployment rate for the three months to February 2011 was 7.8 percent, down 0.1% on the quarter.   However, the U.K.’s National Statistics Office notes the number of people unemployed for more than 12 months increased by 11,000 to reach 847,000.    Last year, S&P said that the country’s AAA credit rating was in danger unless there were drastic cuts made to the country’s deficit.  The International Monetary Fund recently cut its outlook for GDP growth to 1.75%, its third cut in less than a year.  That’s in-line with the views of many independent economists.

The question that opponents of austerity have to ask themselves in the U.K. and elsewhere have to ask themselves is what happens if they succeed and restore all the spending cuts that they want.    Unfortunately, it’s not a magic bullet because it really doesn’t solve the debt problem.   Just like you can’t cut your way to prosperity, you can’t spend your way out of debt. It would be like going on an all Pop Tart diet to lose weight.

Americans will be watching the U.K. elections closely because the issues there mirror what’s going on here.    Unfortunately,  Americans are giving their political leaders mixed signals, arguing that they are both worried about the deficit but opposed to many actions experts say are needed to address it such as cutting entitlement spending.

People in the U.K. and U.S. are going to learn the hard way that they can’t have their fiscal cake and eat it too.

–Jonathan Berr