Will the US Emulate Britain’s Budget Fixes?

As much as the French are known for their petulance, the Brits are known for their stalwartness and steadfastness. So when Britain’s Chancellor of the Exchequer announced budget changes to maintain the country’s AAA rating, the move was met with the typical boos and cheers in House of Commons. But compared to say, the Greeks, the overall reaction was quite subdued.

Here is a summary of the budget changes:

Tax changes

- A 2.5 percent increase in the sales tax, or VAT (excluding food and other necessaries) to 20 percent…. Really? 20 percent?
- Increase in capital gains taxes (from 18 percent to 28 percent)
- Decrease in corporate taxes (on profit and for national insurance)
- Increase in tax threshold by 1000 pounds for owing taxes

Benefits changes

- Freeze on public workers pay
- Freeze on children’s subsidies
- Reduction in housing benefits
- Welfare cuts to the tune of 11 billion
- Raising state pension age to 66

And to top if off, a bank levy of 0.4 percent (0.7 percent after 2011) on banks whose aggregate liabilities exceed 20 billion pounds (about $30B).

Taxing bank leverage or liabilities is an interesting concept, which makes more sense than a bank co-op fund for future bailouts, a plan currently being debated in the US.

But Britain’s approach clashes with the Obama administration‘s clamors for more stimulus. Osborne said choosing between growth and fiscal responsibility was a “false choice.” Perhaps what he really meant was that if Britain could not raise capital or find buyers of bonds due to a deteriorating fiscal condition, then growth would be a mute point and the country could face bankruptcy.

If Britain’s approach fixes their debt problem, can we look for similar changes here in the US?

The U.K. is a test case,” said Tim Adams, a former U.S. Treasury undersecretary and now managing director of the Lindsey Group, a Fairfax, Virginia-based investment consulting company in a Bloomberg report. “If Osborne’s budget works that will have a profound impact on the debate in the US.”

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