U.K.: Budget Cuts, Bring it On!

Thwack! Did you catch the news of Chancellor of the Exchequer George Osborne’s axe chopping down the U.K.’s ginormous public debt? If you didn’t, then here’s the lowdown for you!

Recall that the U.K. has been wrestling with its mammoth-sized public borrowing costs since 2009 when the global recession weighed heavily on the government’s tax revenues and boosted welfare costs such as unemployment and health benefits.

The problem worsened when the government shelled out 200 billion GBP in order to stimulate the economy. In fact, according to the Organization of Cooperation and Development (OECD), the U.K. had one of the largest deficits when it went into recession! Uh-oh.

Today the public debt figure is sitting on the hot seat at 952.8 billion GBP, which roughly translates to 64.6% of GDP. Yikes! Even Pipcrawler cringed on that one! With debt that deep, it’s a wonder that credit rating agencies like Fitch, S&P, and Moody’s still kept their AAA ratings! Apparently, Chancellor Osborne has a few tricks up his sleeve that prevented these hotshots from downgrading U.K. debt.

This week, Mr. Osborne unveiled the much awaited game plan for tackling the U.K.’s swelling budget deficit. With these strategies, U.K.’s debt woes are expected to be over and done with by 2015. Sounds mighty ambitious, right? So what’s the plan?

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First, spending cuts amounting to 7 billion GBP will be implemented. This involves trimming benefits, such as pension credits and family benefit payments. On top of that, local governments will have to reduce their spending by 30% while the justice department and foreign offices will have to trim their budget by 24%. Also, Prime Minister David Cameron said that the annual defense budget will be reduced by 8%. It looks like everyone will have to tighten their belts now. But wait – there’s more…

Chancellor Osborne also announced that around 500,000 public sector jobs would be lost in the next few years as the government starts implementing austerity measures. Banks will also feel the brunt of these cost-cutting measures since they will have to pay higher taxes to the government.

Now, for the million-dollar (or billion-pound) question: Will it work?

There’s no doubt that that program is highly ambitious and unprecedented, as noted by rating agencies and U.K. government officials. According to Fitch, the spending cuts, while much larger than those of other nations facing rating downgrades, are necessary as the U.K.’s deficit is much larger than that of other countries.

Labour Party Leader Ed Miliband labeled the austerity measures as the “biggest gamble in a generation.” But hey, what else can U.K. officials do? The global financial crisis has been very humbling and it’s about time everyone got their act together.

This reminds me of what my daddy always used to tell me:

“Son, you can’t build a home without a strong foundation.”

With that said, I think that while the spending cuts may hurt over the next few years, it is a step in the right direction.


  • Martinius

    What will this mean for the GBP-USD? Should we look after a possible downtrend in the days to come?

  • Martinius

    What will this mean for the GBP-USD? Should we look after a possible downtrend in the days to come?

  • boripat

    A 500k public payroll cut? that’s a huge number of jobs! how can the economy recover if they cut jobs?

  • boripat

    A 500k public payroll cut? that’s a huge number of jobs! how can the economy recover if they cut jobs?