Right-wing commentators have been crowing that the US debt deal. Tim Montgomerie calls it a big victory for “small government” while Toby Young claims that the UK government has cut by a “smaller amount“. The truth is that the UK’s cuts are faster and deeper than anything in the Tea Party’s wildest dreams.
The independent Congressional Budget Office released estimates yesterday of the total effect on deficit reduction of the Budget Control Act 2011. It found that for 2012, the deficit would fall by $21 billion above and beyond the $83 billion deficit reduction set out in President Obama’s March budget. The total consolidation of $104 billion in 2012 equates to 0.7 per cent of US GDP. The Joint Select Committee on Deficit Reduction was tasked with finding an additional $1.5 trillion of cuts over 10 years. But even allowing for $150 billion of that to fall in 2012 only raises the total deficit reduction to 1.6 per cent of GDP. Nobel prize winner, Paul Krugman, has described the deal as a “disaster“.
By comparison, as the graph below shows, UK deficit reduction will hit £61 billion in 2012/13 or 3.8 per cent of GDP. While total accummulated UK deficit reduction rises to 6.6 per cent by 2015/16, the US hits a maximum of 2.5 per cent by 2014 falling to 2.2 per cent in 2015.
The data show that the UK’s deficit reduction remains faster and deeper than that planned by Congress. The right will argue that this is a necessary response to the UK’s large deficit which is expected to have been 9.9 per cent for 2010-11 and 7.9 per cent for 2011-12. But the US deficit is in a similar place at 9.3 per cent of GDP in 2011.
In his excoriating op ed for yesterday’s New York Times, Paul Krugman wrote:
“We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.
“The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.
“Indeed, slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse.”
What he would make of our own cuts is anyone’s guess.
NB: Year 1 is 2011 for the US and 2011/12 for the UK. My calculations can be found here.
Hat-tip: Anthony Painter who despite being on holiday sent over the CBO tables.