Photo: Courtesy of ARK
The UK’s plan to cut government spending and alter the countries tax structure is one the U.S. should be following, according to PIMCO’s Saumil Parikh.Parikh explains that in the UK, the government is operating with very low interest rates, and is using that environment to make structural changes in its economy.
In contrast, the U.K. adopted fiscal austerity in 2010, but did so amid an extremely easy monetary policy regime. Real interest rates in the U.K. are poised to be significantly negative over a secular horizon. Still, at PIMCO, we think the U.K. is implementing what is probably the best combination of fiscal and monetary policies to address deficit reduction, as they have an eye to structural issues.
They are trying to reduce spending and public programs that are focused on current consumption and thus arguably not contributing to future economic growth. Also, they are reducing certain corporate tax rates, increasing incentives for investment, and trying to promote activities that have what we would call high multipliers to economic growth – all so that the future state of the U.K. economy will be, if all goes according to plan, in a much more stable and a much more competitive position.
In the meantime, the UK is faced with high inflation, the sort which is eroding consumer savings. Home prices also continue to fall in the country. So those living on a fixed income are suffering. And those who aren’t are facing a weakening economy.
Despite this dark outlook, PIMCO’s Parikh recomends the U.S. follow down a similar path, and focus on spending more on R&D and energy.
We think the U.S. could learn from the U.K. in this regard. To achieve meaningful economic growth in the U.S. over a secular horizon, we strongly recommend a combination of revenue-side and expenditure-side changes in policy that are structural in nature. In our view, a growing percentage of U.S. expenditures are income transfers to the household sector that do not address the long-term structural issues of high unemployment and a dearth of job creation.
We see great economic benefit from shifting some of that spending from consumption to investment – for example, to the energy sector, where the U.S. has a large deficit vs. the rest of the world. More spending on research and development of domestic energy sources would not only create jobs today, but would also reduce the U.S. trade deficit in the future. We also advocate more spending on other research and development and on education, because ultimately, if the U.S. continues to fall in education standards and in its share of global patents and global innovation, then this reduces its ability to be a world leader in future economic growth.
Parikh may be correct about the income transfer story, but austerity measures in the U.S. are likely to have a similar impact to those in the UK, the slowing of short-term growth. Any slowing in growth will impact government tax revenues, which will, in turn, inhibit our ability to pay down debt. If debt to GDP rises, like it appears to be doing in the UK, then austerity is solving little.
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