Commentary: Americans Need Shock to Tackle Debt

Why has Britain managed to boldly go into fiscal territory which the US has hitherto ducked? That is the $800 billion question hanging in the air in New York this weekend, after George Osborne, chancellor, visited the city.

Chancellor of the Exchequer George Osborne holds Disraeli's original budget box as he leaves 11 Downing Street for Parliament.
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Chancellor of the Exchequer George Osborne holds Disraeli's original budget box as he leaves 11 Downing Street for Parliament.

During his whistle-stop tour, Mr Osborne met a host of Wall Street and New York luminaries, at a breakfast hosted by Tina Brown, the media icon, and a dinner arranged by Michael Bloomberg, the mayor.

As he schmoozed he was greeted with emotions ranging from respect to rapturous applause.

What provokes respect is the way London has not only created a multi-year fiscal reform plan, entailing a striking £110 billion worth of adjustment – but, more importantly, started to implement it.

After all, in the US – like the UK – national debt is surging.

And a bipartisan commission recently produced some sensible medium-term proposals to reduce this debt by almost $4,000 billion, using a policy mix similar to the UK’s.

But last month these bipartisan US proposals were in effect shot down amid political gridlock; and last week President Barack Obama was forced to cut an $858 billion deal with Republicans to extend the Bush-era tax cuts.

That threatens to increase the US debt burden again.

To jaded New Yorkers, the contrast with the UK could hardly be more stark.

So what explains this contrast? Unsurprisingly, Mr Osborne tried to grab some credit last week: with a slick, humorous delivery, he emphasized the “bold” decision the Conservatives took to form a coalition with the Liberal Democrats.

That, he argued, widened support for fiscal reform.

“The public is with us,” he declared.

But in reality, differences in political culture and structure also explain the contrasting tales.

Britain’s three-party system makes it easier to create a coalition than US’s two-party structure.

More important still, since UK parliamentary terms run for up to five years, the coalition has been able to impose austerity without constant fear of electoral revolt.

In the US, by contrast, there is a two-year cycle and the two parties are already preparing for 2012, making compromise hard.

I suspect there are also subtle historical and cultural issues at play.

The British electorate has already experienced belt-tightening in recent memory (the 1970s) and has lived with a sense of national decline for a century.

The US has not.

That gives an emotional – and at times irrational – edge to its debate about debt with fiscal reform deeply linked to national status and identity.

However, the single biggest reason for the contrast between the UK and US is geography – and markets.

From a political and psychological point of view, Mr Osborne has near perfect conditions to prepare the UK population to swallow austerity: although Britain has not suffered a market shock itself, investors and voters alike have seen what is occurring, on their doorsteps, in the euro zone.

“If you turn on the evening news, item two is Portugal or Greece,” Mr Osborne observed.

The US has hitherto faced extraordinarily little market pressure for fiscal reform.

Instead, investors have continued to gobble up treasury bonds, even as US debt has spiralled.

And though US yields have risen recently, this has not been dramatic enough to concentrate political minds.

Right now, US leaders certainly prefer it that way.

But the rub is that without some form of external shock, there is little chance of an end to US political gridlock.

Or, to put it another way, some drama is probably needed to concentrate political minds on the need for medium-term reform.

Perhaps it is time for Mr Bloomberg to invite the finance ministers of Greece, Ireland or Portugal to New York.

That might yet produce an even more sobering message for Americans than anything Mr Osborne had to say.