US next in line for harsh budget cuts

The US Capitol Building. Washington, D.C. Photo / Thinkstock

Fiscal austerity measures detailed yesterday by the British Government will soon be needed in the United States, according to Willem Buiter, Citigroup's chief economist.

Britain's deepest budget cuts ever, outlined by Chancellor of the Exchequer George Osborne, will eliminate almost 500,000 public sector jobs and impose a levy on banks.

The moves are part of a plan to reduce the £156 billion ($328 billion) deficit, which is forecast to be 10.1 per cent of gross domestic product this year, to 2.1 per cent in the 2014-15 fiscal year.

"The only question was really the timing and the composition, given the finite willingness of financial markets to endure budget shortfalls," said New York-based Buiter.

"This is very savage, but no more savage than what the US will have to endure when it gets going."

Stimulus spending to revive the economy and the lingering effects of the recession on tax revenue pushed the US budget deficit for this fiscal year to US$1.29 trillion ($1.71 trillion), the second-largest on record, the Treasury Department reported.

The gap was surpassed only by last year's US$1.42 trillion shortfall.

The US would still be able to borrow for a while at "risk-free rates" because its markets were bolstered by the dollar's role as the world's reserve currency, said Buiter. But "it won't last forever, that buffer of protection".

"Market discipline is being eroded by the burden of unsustainable deficits."

Governments now faced the question of when to begin addressing budget imbalances, said Howard Davies, chairman of the London School of Economics.

"Our Government has made a big throw of the dice today and said we've got to get on with it because the existence of this large deficit is an overhang on the economy, preventing people from regaining confidence and investing," Davies said.

"They know that at some point they're going to have to pay increased taxes or public spending's going to be cut."

The cuts were the right thing to do, Davies said. It was an open question whether Osborne had focused "too much on spending and not enough on taxing".

"I hope he's willing to be a bit flexible."

- BLOOMBERG