On both sides of the Atlantic 2013 begins with the hang over from 2012. Just how much more debt will the US, the UK and Euroland take on this year? Can they go on adding to borrowing at the frantic pace of 2009-12? What do they all mean when they say they are cutting the deficits? Can they achieve it?
All main political parties in the US, UK and Euroland agree that the deficits have to be brought down. All understand that faster growth would help bring that about. By their deeds, all acknowledge that the huge deficits being run are not in themselves able to bring about the faster growth they crave. Some parties of the west speak with forked tongues on the deficits. They both claim with the rest that they need to be brought down, but also claim that prolonging a larger deficit for longer would somehow help speed growth.
In the USA the row over the so called fiscal cliff arose because the last time the US had to confront its excessive debts the politicians put in automatic tax rises and spending cuts in case no-one got around to making some necessary changes. These came back to haunt them. Neither the Republicans nor the Democrats wanted the combination of tax rises and spending cuts they had enacted to trigger at the end of 2012. Both parties had every incentive to find a different way through. The Republicans wanted no tax rises at all. The Democracts only wanted tax rises for the rich. The Democrats wanted very few spending cuts. Even some Repuiblicans were uneasy about defence cuts. Compromise entails borrowing more, the easy way out. That is why they are bound to end up doing just that. The US will borrow more, and will raise its borrowing ceiling. We have seen the first compromise to keep most of the Bush tax cuts. Now there will be a row about the spending, before they solemnly decide to raise the permitted borrowing ceiling.
What was bizarre in the USA was to see a Democract President claim credit for renewing Republican tax breaks from the Bush era, whilst increasing taxes on the highest payers to fulfill a campaign pledge, whilst the Republicans came over as split and part of the “problem”. They did not get across to much of the media that the tax cuts were originally Republican, and that Obama care entails higher taxes and charges offsetting some of the benefit of the tax cuts.
In the UK the Chancellor towards the end of 2012 admitted he would not start cutting the state debt as a proportion of our output by the end of this Parliament as originally promised. The UK is likely to end up borrowing more. In the second half of the Parliament Ministers are likely to want to relax spending totals. The big welfare reform package starts to come in and will doubtless need large sums to pump prime the changes. The government is itching to boost capital spending, the one area the outgoing Labour government and incoming Coalition did make large cuts.
In Euroland they will carry on cutting in the distressed countries. Continuing recession will undermine revenues more, forcing more spending cuts. The German economy will recover as the emerging markets improve and take more German exports. Their recovery will be assisted by the German government’s own spending cuts, as they are more determined than most to control their deficit. There is also some scope for extra private sector domestic demand in Germany. Meanwhile, the weaker countries will struggle with the iron discipline of the Euro, and without the ability to offset it individually by the kind of national monetary action the US and UK are taking.