Busch: UK Plans, US Promises

In an extension of “The-guy-in-charge-made-a-mess-of-things”, Fitch ratings agency released their first report on the UK since Cameron took over and it wasn’t pretty.

Fitch said, “….the scale of the UK’s fiscal challenge is formidable and warrants a strong medium term consolidation strategy – including a faster pace of deficit reduction than set out in the April 2010 Budget … However, the rise in public debt ratios since 2008 is faster than any other AAA rated sovereign and the primary balance adjustment required to stabilize debt is among the highest of advanced countries.”

What’s really great is that the UK wants to be like Canada! Apparently, they are building ice rinks to….no; seriously, they are attempting what is great about Canada: fiscal prudence. As the UK’s Telegraph points out, Canada brought public spending under control guided by the principle that people should ask "what needs to be done by government and what we can afford to do".

Tomorrow, the UK’s David Osborne is going to release a fiscal austerity program that will potentially contain massive cuts to public spending on the scale of what Canada did in the 1990s. Under PM Chretien, they cut spending by 20% to reduce the budget deficit that had swollen to 9% of GDP. The pain for the public sector and public sector services will be acute, but can set the stage for positive, consistent growth in the future.

This is clearly the path forward for any country serious about avoiding a “Greece Fire” and serious about changing the role of government in the economy. While government can provide certain public goods that are necessary, they generally do a very poor job of creating economic growth without a subsequent increase in debt …. even Keynes didn’t advocate structural deficits.

In this vein, President Obama has directed federal agencies to develop plans for cutting 5% from their budgets and augments the President’s promise to freeze non-military, discretionary spending at most agencies for the next 3 years.

While it’s a decent start to getting a bit of spending under control, the President should focus on what will be negatively impacting the structural budget deficit the most. This would be health care and the new health care legislation.

In a fiscally disturbing report, the Congressional Budget Office reviewed, “Health Costs and the Federal Budget” to include the new law. Here’s the conclusion: “Putting the federal budget on a sustainable path would almost certainly require a significant reduction in the growth of federal health spending relative to current law (including this year’s health legislation).”

For now, the US is the biggest beneficiary of the global financial crisis as its sovereign debt is a perceived safe haven. However, the US is running budget deficits on the scale of Greece and issuing massive amounts of new debt.

If US growth falters, tax revenues decline and budget deficits go up. For now, Ben Bernanke has reassured that the economy will continue to grow, but at a slower pace than normal given the depth of the recession.

While the UK braces itself for a large restructuring, the US is going in the opposite direction. How long this lasts is a function of the continued growth of the US economy and global bond vigilantes.

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    Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.