Austerity in the UK?

No matter the political hubbub that follows, Britain’s 2013 budget plans clearly show austerity is still a misnomer, at least in the UK.

Government budgeting is its own form of political theatre—no matter which country’s currently playing the lead. In the UK, there’s been a continuing drama over the budget, and Wednesday’s Autumn Statement (the initial report on 2013’s budget) simply added another twist in the plot—or did it? See, after the release of the statement, many lamented the introduction of more austerity to the UK. However, we’d quibble with such worries because, to us, at least insofar as austerity means a decrease in overall government spending, the UK act is mostly a charade. And this new budget, well, doesn’t seem to include spending cuts.

Nor has any recently preceding budget. In fact, overall government spending has actually increased each and every year since 1985—not too clearly a case of historical austerity. And that’s still true today. Total public sector spending in 2011-2012 was £643.1 billion and is expected to rise to £660.7 billion in 2012-2013, £671.9 billion in 2013-2014 and so on ... to £716.2 billion in 2017-2018. A projected £73.1 billion rise in government spending in about five years doesn’t suggest the UK government’s trying to slash expenditures. And the Autumn Statement follows the trend. Most of the propositions were mainly a matter of moving pounds from one pocket to another. For instance, while local government spending is expected to decrease 2% in 2014, schools are expected to receive an additional £1 billion.

Not only is spending shifting around, so are taxation and public benefits. Qualifying thresholds for income and inheritance taxes will rise, and an anticipated fuel duty was cancelled—likely easing some pressure on taxpayers. But hundreds of thousands of workers were pushed into higher tax brackets—400,000 more folks will be subject to the 40% rate. Pensioners would also likely be less amused—the amount of pension that’s not subject to British taxes was cut from £50,000 to £40,000 (effective April 2014). And those receiving benefits could find themselves strapped for cash due to other pension changes. State employees will receive a 2.5% pension raise, while most other benefits will rise 1%. Though benefits overall reflect raises, they’ll increase slower than headline inflation—which could be painful for some, and the basis for some arguments that austerity lives in the UK.

But here’s a key point overlooked when discussing low future increases to public benefits—they’ll still increase. So while public benefits may not outpace inflation, they’re not being cut and, therefore, seem very unlikely to carry the major economic toll often assigned to government spending cuts. Nor will any part of the Autumn Statement likely materially or negatively affect the UK economy, as its budget hinges on increased spending hidden by strategic reshuffling. The UK’s austerity drama seems to increasingly rely on smoke and mirrors.

Or should we call that politics? Realistically, looking at this budget with various cuts and raises but no real change to the budget’s functions or spending levels—it still takes in taxes, though maybe different ones, and pumps the revenue into government programs, though maybe different ones—it’s apparent the budget was formed by a coalition of differing political biases protecting their own interests. Which is great! Political gridlock generally helps stymie contentious legislation. On top of that, this budget is still just a proposal, meaning more politicking and hot air about supposed austerity will be coming.

What’s afoot in the UK is the much-discussed, austerity-driven cuts aren’t gutting actual government spending, they’re slowing the rate of slated spending growth—a fact mirrored by the vast majority of the US’s fiscal cliff cuts too. (Actual, yet slight, reductions in calendar 2013 spending would be followed by a slower rate of spending growth in the years beyond.) When consuming government budget talks, our advice is to recall: When it’s government finances you’re referring to, a cut isn’t always a cut. That’s center stage in the UK’s budget and the difference isn’t semantic. Just be sure to keep in mind the facts, so you don’t get swept away in the show.

If you would like to contact the editors responsible for this article, please click here.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.