UK austerity policies a cautionary tale

SALISBURY, England — Trussell Trust was founded here more than a decade ago to help starving children in Bulgaria, but in recent years the nonprofit has expanded its mission dramatically in a once-unthinkable direction, opening more than 200 food banks across the United Kingdom.

This year alone, the centers have distributed free groceries to about 130,000 British families, more than double the number in 2011.

“The fact that people need food in 21st-century Britain is certainly shocking,” said Molly Hodson, a spokeswoman for the trust, as she sorted canned beans at the Trussell Trust clearinghouse recently. “This is a time of crisis in the UK.”

Advertisement - Continue Reading Below

As US political leaders debate tax increases and spending cuts to close the nation’s budget deficit, England is implementing deep cuts in government spending as part of a multiyear plan to halt a widening budget gap and and preserve the country’s AAA credit rating. But two years of austerity have backfired as a struggling economy slipped back into recession and a plan that was supposed to bring deficits under control within five years will take longer than predicted.

In many ways, it is a cautionary tale for political leaders in Washington who face a Jan. 1 deadline to reach a budget compromise before a series of automatic spending cuts and tax increases take effect. About $500 billion in US government spending cuts will take effect unless President Obama and Congress reach an agreement.

Some economists, noting England’s malaise, said such measures would defy generally accepted economic views that cutting spending at a time of economic weakness only hurts the economy more.

“An austerity drive now would raise our already painfully high unemployment rate and might trigger another recession,” said economist Peter Diamond, a Nobel laureate and professor emeritus at the Massachusetts Institute of Technology. “If the cuts are big enough, it can derail the economy and set it back, which is what we are seeing in Britain.”

Britain’s Parliament, led by Conservative Prime Minister David Cameron, enacted steep spending reductions when his coalition government took office in 2010. Most departments were required to slash at least 25 percent from their budgets, shaving $180 billion from the nation’s $1.4 trillion debt.

The government estimated 66,000 public jobs would be lost in the first two years of austerity, but so far about 372,000 have been eliminated, according to Lombard Street Research, a London forecasting firm.

The Cameron government also imposed a wage freeze for all but the lowest tiers of government workers, tougher requirements to qualify for public housing and disability payments, and massive cuts to the welfare system.

At the same time, the sales tax on most goods and services was raised to 20 percent from 17.5 percent and capital gains taxes on investments increased to 28 percent. Corporate taxes were reduced to 24 percent from 28 percent over five years to encourage business growth and hiring.

Cameron said the measures were necessary for a nation facing its largest-ever peacetime debt, a financial abyss that grew deeper after a massive taxpayer bailout of the nation’s banking industry in 2008 and 2009.

The government and its supporters concede that these steps are painful in the short term, but argue they will maintain the confidence of financial markets, attract business and investment, and lead to prosperity, much as the austerity policies of Margaret Thatcher in the 1980s revived a moribund British economy.

Earlier this month, George Osborne, chancellor of the exchequer, the government’s top financial official, announced that austerity measures would need to be extended into 2018 because of a slower recovery than forecast, which he blamed on the broader economic slowdown in Europe. But Osborne asserted that the bitter economic medicine was beginning to show results, as evidenced by the flow of investment into British government bonds, a sign of increasing confidence in the UK economy.

“It’s a hard road, but we are getting there,” Osborne told the House of Commons. “Britain is on the right track — and turning back now would be a disaster.”

The British economy had appeared to be recovering from its own housing bust and financial crisis, but spending cuts enacted in 2010 began to take a toll by the end of that year, and Britain slipped into a double-dip recession.

“The consumer died, and at the same time, Europe, the UK’s biggest trading partner, went into a tailspin,” said Carl Weinberg, chief economist at High Frequency Economics a forecasting firm in Valhalla, N.Y.

Nearly everyone in Britain has been affected or knows someone who has been affected. Labor unions have launched protests against measures that slashed jobs, benefits, and public pensions. One in five people between the ages of 16 and 24 are out of work. Job opportunities are scarce — even with a university degree.

Like many who graduated from college since the global financial crisis four years ago, Jonathan Fry, 25, has struggled to find full-time work. He signed up for a volunteer police force in South London in the hope it will lead to something more, taking a 16-hour training course to qualify. But he understands the reality — police hiring is down in an era of budget cutting.

“The hardest thing to do is find a job,” Fry said on a recent day at a South London food bank, where he also donates his time. “I’m just biding my time.”

Derek Wade, was a high school teacher before government cutbacks cost him his job. Today, he works as a security guard, recently on location at a construction site in Central London, not far from Buckingham Palace, earning much less.

Wade, 47, said he landed the security job after a year of unemployment, but the stress of that period contributed to the end of his 22-year marriage. Now, the father of four lives alone in a small apartment outside London.

“It’s tough,” he said. “You have to believe in yourself, believe that you’ll always land on your feet.”

While the UK economy improved around the Olympics this past summer, officials have predicted another decline at the end of this year. About 2.6 million people were unemployed in October, about 1 million or 60 percent more than at the start of the recession in 2008. The unemployment rate was 7.8 percent, about the same as the United States, but is expected to rise.

For those near the bottom of Britain’s economic ladder, daily living has become desperate.

Brenda Nanteza and her 7-year-old son have been homeless for nearly two years, spending nights at the homes of friends and acquaintances.

Nanteza, who emigrated from Uganda to London as a college student, dropped out of school when she had her son and worked as a housecleaner. But those jobs have dried up. Without money to buy food and other basics, she frequents food banks while her son is in school.

“I don’t know what to do anymore,” Nanteza said. “You just can’t keep moving from couch to couch.”

The government plans to reduce billions more in spending on welfare benefits and overseas development in 2013, redirecting money into improvements for roadways and bridges, according to Robin Twyman, first secretary for trade and business affairs at the British Embassy in Washington.

“We got into this mess because of borrowing and we can’t get ourselves out of it by borrowing,” Twyman said.

But the cuts, and the recessions, have exacted a toll. Salisbury taxi driver John Reading, 74, said he can’t afford to buy a pint anymore and has watched pubs in his town close. Many young people avoid them to save money for other pursuits while older regulars do without. “Everybody’s struggling, apart from the very rich,” he said.

Reading said he still works because his retirement investments and government pension — akin to Social Security in the United States — have shrunk.

Yet Reading said he is luckier than some. Unlike unemployed construction and factory workers whose fortunes depend on the revival of industries, he can still drive his 20-year-old cab with more than 400,000 kilometers — or just under 250,000 miles — on its odometer.

“Look at the faces of most workers, they’re all a bit drawn,” Reading said. “We’re all worried.”