UK ‘austerity’ sits in sharp contrast with US bounty

The UK Budget was said to be about more emergency spending now, with tax rises and spending cuts to come later: what I called in this column last week an Augustinian Budget. In fact, we have discovered that there were quite a lot of hidden spending cuts and tax rises sooner rather than later.

There is a striking contrast with the massive $1.9tn stimulus package which the Biden administration has just managed to get through both houses of the US Congress. British “austerity” now sits in sharp contrast with American largesse. Who is right?

Like the UK, the US has had a bad pandemic in terms of loss of life thanks to the cavalier and inconsistent leadership of President Trump and the Covid-deniers among his supporters. In the league table of deaths per million of the population, Britain leads among major countries with 1,828 per million; the US is close behind with 1,621.

But America has suffered much less economic damage. The British economy contracted by 10 per cent last year whereas the US shrunk by only 3.5 per cent. The UK’s lockdowns have been longer and more severe, except in a few American states like California. What has been somewhat worse in the US has been unemployment (officially 6.3 per cent, against 5.1 per cent in the UK), mainly because the British furlough scheme has been successful in keeping a lot of people in employment, though not in work.

We have seen great hardship in the UK, with growing use of food banks, and the self-employed falling through cracks in the government’s support system. But at least we have the NHS. Even after “Obamacare”, there isn’t the same degree of public health protection in the US. And despite the serious limitations of our welfare system – not least barriers to sickness benefit and the lack of generosity of universal credit – there is a stronger safety net than in some American states. In parts of the US, Republican “small state” ideology has been taken to such extremes that unemployment leads to destitution.

Both the UK and the US in their different ways gave massive support to their economies last year to offset the effects of the pandemic and lockdown. But now the Biden administration has opted for an additional package of welfare measures and economic stimulus of around 9 per cent of American GDP, whereas the Sunak Budget added only 3 per cent of GDP over two years in further stimulus measures.

Biden has achieved his stimulus despite the political barriers – getting it through both highly polarised chambers of Congress. Sunak’s party has a large, secure majority, and could have been even more ambitious since Labour would have been hard-pressed to oppose support for the economy.

The contrast arises both from a different ideology on this side of the Atlantic, and on a judgement that the US can take more risks. America has a basically sound economy which needs an injection of purchasing power to make it fly. It is getting another big boost even though it is set to return to pre-pandemic levels of activity this year, in contrast to the UK which will get back to 2019 levels at the end of 2022 at the earliest.

The UK has deeper problems in the form of poor productivity and skill shortages, aggravated by Brexit, which will result in an upsurge in inflation rather than output if too much demand is pumped into the economy. In a striking statement of its priorities, the government last week actually abandoned its industrial strategy, designed to tackle these deeper problems.

The Biden stimulus differs also from the UK measures in another way: it relies on universal payments to all but the well off. Everyone gets a cheque of $1400 providing they earn under $75,000 (or double that for couples who file joint tax returns). In addition, there is $300 a week extra for the jobless and a child tax credit of $3000 per child. The idea is to get all Americans spending, not just those who have been able to accumulate savings. And the stimulus package tries to reduce income inequality directly.

By contrast, in the UK, the £20 a week boost to universal credit is to be withdrawn in September at precisely the time when furlough ends and many families will face renewed hardship. The rise in council tax hits those on low incomes disproportionately hard. Public sector workers get no increase in pay except for the nurses with their miserly 1 per cent rise, which has incensed unions and the public.

A more favourable comparison is with the hourly minimum wage (now called the National Living Wage), which in the UK goes up to offset expected inflation to £8.91 (around $12.50), while the US Congress voted down a rise in the federal minimum wage to $15 from $7.25 (there are some higher payments at state level e.g. $14 in California). A group of eight Democrat senators rebelled, to keep down the minimum wage.

Nonetheless, what is clearly emerging is a divergence of viewpoint both within the US and between the US and the UK. The Biden administration has made a much bolder move to reduce inequality and to spend big for social policy objectives than the Clinton or Obama administrations did, albeit from a more precarious position than either enjoyed. It is shaping up to be a properly social democratic administration.

In consequence, bipartisanship has been abandoned before it started, reflecting pessimism about its potential while the two parties are so polarised. But if, as seems likely, the Republicans have been captured by the Trump cult, they may split and thereby gift the Democrats further advances in the 2022 mid-terms, and a solid run in federal government. Biden would then have the chance to build on his unexpectedly strong start as a seriously radical president.

In the UK, any hope of some kind of new Tory “one nation” radicalism, based on an “end to austerity”, is evaporating fast. The big spending of last year is being tapered out. The nurses pay award is an early warning.

There are high public expectations of big investments in health and education, social care, infrastructure – especially in the North – but little sign of how this can be accommodated in a shrunken economy with a government already allergic both to growing debt and to tax rises except by stealth. The British public currently appears to like the Sunak Budget, but they may like it less when it becomes clear that there are years and years ahead of attritional warfare over spending and pay.

Therein lies an opportunity for the government’s opponents. What is happening on the other side of the Atlantic may fall some way short of a Roosevelt-style New Deal but it begins to paint a picture of an activist government trying to remedy extreme inequalities and the legacies of the pandemic. If it is seen to succeed, people would be right to ask: why can’t we do that here?