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Wednesday, Oct. 27, 2010

A British lesson for Japan?


The program of cuts to be made in the British budget over the years to the next election due in 2015 was outlined by Finance Minister George Osborne to Parliament on Oct. 20. The program envisages the elimination of the structural deficit by 2015 and the axing of just under half a million jobs in the public sector. In nominal terms British government expenditure will remain much the same at the end of the period as it does now, but allowing for inflation the program envisages substantial cuts in real terms. Public-sector wages will be frozen for two years and public-sector workers will be expected to contribute increased sums toward their pensions.

The health service and overseas aid have been exempted from cuts. Education has only suffered a relatively minor reduction and extra funds have been provided for a pupil premium for children from disadvantaged backgrounds. Cuts in defense expenditure have also been limited, not least because of the war in Afghanistan. Pensioners have been largely protected from cuts, but the age at which the meager British pension is paid will be increased for men and women to 66 from 2020. Some major infrastructure projects have also been spared. As a result of these decisions other departments have had to bear more swinging cuts. In particular the welfare budget is to be reduced significantly although most of the cuts are being applied in stages.

The main tax rises — namely an increase in value added tax from 17.5 percent to 20 percent from January 2011 and confirmation of the 50 percent tax rate on the highest incomes proposed by the previous government — were announced in June. But there will be a further tax on banking and families on higher incomes paying tax at the higher rate of 40 percent will cease to qualify for child benefit and the level at which the higher rate is payable will be lowered.

The government aim to achieve significant savings by increased efficiency in administration as well as by abolition of bureaucratic targets and unnecessary quangos (appointed bodies to dilute ministerial responsibility). Most governments declare similar aims but savings by these means are notoriously difficult to achieve.

The opposition Labour Party claims that the government measures attempt to reduce the deficit too quickly and that they may provoke a "double-dip" recession. The government responds that it aims to promote growth in the private sector that it hopes will provide employment for public-sector workers made redundant. It also argues that the Bank of England, by its control of interest rates and the money supply, can step in to prevent or at least mitigate any damage done to the British economy by the government's austerity program.

The opposition also argues that benefit cuts, especially the limits to be imposed on sickness and disablement benefits, will also do serious damage to the livelihood of the poorest sections of the population. But there seems to be a general feeling in both middle- and working-class families that many on benefit have been favored at the expense of ordinary working people, and that there are too many benefit scroungers and fraudsters. This perception may well be unfair but it is a pretty widely held belief. Certainly the government's intention to limit benefits to not more than average income and to increase incentives to work is generally supported.

The government argues that Britain's public-sector deficit is one of the highest in the Group of 20. By piling up public-sector debt we are saddling our children and grandchildren with an increasing burden just to pay outstanding interest. Unless drastic steps are taken to cut the deficit British debt could be downgraded, which would increase the burden still further.

Some British trade unionists on the left have called for mass protests against the cuts on the lines of the protests that have been causing trouble in France. Certainly public-sector workers who are likely to be affected by the cuts will protest strongly, but those affected by benefit cuts are not organized by the unions and may not be able to bring significant pressure to bear on the government to force radical changes in the program.

Britain and Japan face similar problems but there are significant differences. Japanese public-sector debt is largely owned by Japanese citizens who seem content to receive minimal interest on their holdings. A good deal of British debt is held by foreign interests. This complicates the British position and keeps interest payments in line with other national debt.

Inflation in Britain has been growing and it may not decline as fast as the Bank of England hopes. Japan continues to face deflation.

The British economy is much more open to the world than the Japanese economy. Foreign ownership of companies and foreign investment are much more significant factors in Britain than in Japan.

The British system of welfare and universal benefits may not be as extensive as in some other European countries, but the National Health Service is now so important to Britain's aging population that the coalition government dares not cut it. Japan also has developed a significant health and welfare system, but the Japanese safety net seems to protect Japanese citizens less effectively than comparable systems in Europe. This means that there is less scope in Japan for cuts in welfare benefits than in Britain. And Japan has different defense priorities.

What can Japan learn from the British austerity program? Japan surely cannot forever postpone the task of bringing the public-sector deficit under control. The level of the consumption tax will have to be increased at some stage or perhaps a comprehensive value added tax adopted. Pension reforms are also needed, and more must be done to cope with Japan's aging population.

Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984.


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