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In Britain, Austerity Collides With Pension System

Landon Thomas Jr.  |The New York Times

It may be the age of austerity for many in Britain. For a former doctor, Geoffrey Lipman, it is anything but.  Dr. Geoffrey Lipman, who is retired, gets about $78,000 a year in his government pension.

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Dr. Lipman’s annual government pension of £48,000, or nearly $78,000, nicely supplements the £144,000 tax-free payment he received when he retired from Britain’s National Health Service in 2007 after 35 years of service.

He also makes use of the wide menu of universal benefits available to older Britons — including free bus travel and annual payments of £200, or $324, to defray winter heating costs. Next month, when he turns 65, he will qualify as well for a second government pension payout of £104 a week, plus a £10 bonus at Christmas.

Dr. Lipman’s payments are emblematic of what Britain’s Conservative prime minister, David Cameron, is up against, having hitched his political fortunes to the coalition government’s ability to cut the national budget. Despite Mr. Cameron’s efforts to curb public outlays and reduce one of Europe’s biggest budget deficits, government spending is higher than when he took office two years ago. This continues a climb that began with the creation of the British welfare state after World War II.

The cuts Mr. Cameron has made — a public sector pay freeze, a reduction in outlays for local governments and cutbacks in personnel at government ministries, to name a few — have drawn howls of protest. The outcry has come from unions; the Labor Party, which now has a strong lead in the polls; and even a growing faction of Tory-supporting business leaders.

But overall government spending, as a portion of the economy, continues to rise. It is projected to approach £700 billion this year, or about 45 percent of gross domestic product, compared with 38 percent a decade ago. That is partly a result of social benefits, mainly for the elderly, that are deemed politically off-limits and are being propelled up by a demographic curve that will add millions of Britons to the retiree ranks in coming years.

“Austerity is just not a word that I recognize,” said Dr. Lipman, who since retiring from full-time work as a family doctor in the northern city of Leeds has upgraded the car he drives to a Mercedes. “I would not say that I am worried financially.”

The issue in some ways parallels the challenge facing the United States, where growing numbers of retiring baby boomers threaten to bankrupt the Social Security and Medicare systems within decades unless those systems are revamped. And as in the United States, because people still working are paying for retirees’ benefits that are more generous than younger people can expect to receive, the budget struggle has elements of a generational dispute.

Younger doctors in Britain do not expect to receive the same benefits as Dr. Lipman. This year they held a one-day strike to protest the government’s decision to raise their retirement age and their pension contributions.

In Britain, “the welfare state can no longer carry this burden,” said Angus Hanton, an economist and a member of the advisory board of the Intergenerational Foundation, which advocates on behalf of younger Britons.

With British tax revenue remaining weak because of an economy that is forecast to shrink 0.5 percent this year, it is becoming ever more likely that Mr. Cameron’s government will miss its goal of cutting the deficit this fiscal year to £120 billion, from £126 billion last year.

The International Monetary Fund estimates that Britain will have a deficit this year of 8.1 percent of G.D.P., surpassing Spain and even Greece and trailing only Ireland among the distressed euro zone economies.

Opposing politicians — and some economists — have accused Mr. Cameron of destroying any chance for economic recovery by sticking to his austerity platform. He faces growing pressure to reverse course.

“We have not gone far enough — you can keep the welfare state as long as you have economic growth, and this is not happening,” said Tim Morgan, an economist at the brokerage firm Tullett Prebon in London who tracks government spending patterns.

For now, many bond investors are disregarding Britain’s deficit. Continuing to see the pound as a haven from woes in the euro zone, they are lending money to Britain for 10 years at an interest rate only slightly higher than Germany’s 1.6 percent.

But at least one hedge fund manager, Ben Davies of Hinde Capital, is betting against British bonds. “The government has this austerity program, but spending and debt continue to increase,” Mr. Davies said. “It’s very disingenuous, and I think by the end of the year the market will question whether the government can truly implement these cuts.”