Cut Costs and slashing spending has become all the rage lately. State governments, the federal government, even foreign governments have come to the realization that you can’t keep spending money you don’t have forever.
Deficit spending requires a number of willing partners. Trading partners, foreign central banks, and institutional investors will very soon reach a point where they no longer want to keep financing this type of activity.
Two countries that are facing this situation are the United States and the United Kingdom. Leaders of both countries have professed to take a stand against budget deficits, yet the strategies employed by each country are very different. Which cost-cutting strategy is more likely to succeed?
Which strategy will be more effective for your business?
Let’s take a closer look and find out.
The David Cameron approach: the axe
When David Cameron was appointed Prime Minister of the United Kingdom in May 2010, he faced a daunting fiscal situation: a £156 billion annual budget deficit; national debt approaching £1.4 trillion; and interest payments alone on track to consume 10 percent of tax revenues. His approach to tackle the situation was intense, swift, and in some cases brutal: a 19 percent average, across-the-board budget cut for most departments over four years. Not a reduction in the rate of increase not keeping budgets frozen, but instead actual cuts. For a national government, that is as radical as it gets. Given the scale of the problem, it is a bold solution that is on track to achieving its intended goal – a government budget that spends within its means.
The Barack Obama approach: the scalpel
In the United States, the president recently submitted his budget proposal to Congress for the 2011 fiscal year. While the final budget awaits Congressional action for approval, it is expected that the final result will generate a $1.65 trillion deficit for the year. Our problem is at another order of magnitude compared to the United Kingdom. The president’s budget takes a more refined approach, using a combination of spending cuts, spending increases, and tax increases to generate a $1.1 trillion reduction in the cumulative deficits of the next 10 years. It is not on track to balance the budget. For this fiscal year the final reduction in spending will most likely be less than $60 billion. This is less than 3.6 percent of the 2011 budget deficit. It does, however, preserve most existing government programs and continues to provide services that a significant portion of the population consider important.
Go to the article: Should You Cut Costs Like Barack Obama or David Cameron?
