Is austerity the best policy?

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The UK government is in the middle of implementing serious cuts in spending to get their deficit under control. The cuts were seen as extensive by any measure but were also being touted as necessary to avoid losing control of their rising debt. It was definitely true that their debt was rising and needed to be addressed, but the large spending cuts may have cut more than just the debt trajectory. In recent months, the UK has seen their economy stagnate. This is comes at the same time that most other countries are seeing a growing economy as the U.S. and other countries recover from the recession.

What is currently happening in the UK is important for Americans to look at as well because the same talks about¬†extensive¬†budget cuts are being talked about by Republicans and some Democrats. The U.S. also needs to address a growing debt without a doubt. However, the level and types of cuts need to be well thought through given that the UK’s cuts seem to have hurt economic growth which could also grow the debt since revenues will be lower.

The likely correct approach to deal with a growing national debt is not to bank on spending cuts alone to do the job. Some spending cuts definitely need to be part of the picture and we all know governments always have inefficient spending that can use some cutting. However, some tax increases will need to come in order to balance the picture so that we do not cut spending so much that the economy stops growing like the UK is experiencing right now.

To start, the U.S. does not have the lowest corporate tax rates by any means. However, there are so many loopholes for businesses that the effective rate can even sometimes be zero (See GE). These loopholes need to be closed. Once this happens, it may generate enough tax revenue that they may even be able to cut corporate tax rates which will make investing there seem like an even better idea. Next, the income rate on the rich needs to be set back a few percent to where it was under President Clinton. Maybe putting it on those earning $250,000 per year is a bit too much, so they can increase it to those earning $400,000 per year. This will still net them a lot of tax revenue.

These two changes, combined with some spending cuts is probably the best way to get the debt under control while still enabling the economy to continue growing. When governments take bold economic steps like the UK did, others need to learn from their experiences. Hopefully the U.S. will learn from the UK’s mistakes.