Fiscal Cliff? Britain has already jumped

Newport, Wales (Getty Images)

Is this what life on the other side of the "fiscal cliff" looks like?

If President Barack Obama and congressional Republicans fail to reach a deal in the coming weeks, Americans face a fierce wave of tax hikes and spending cuts that could threaten the U.S. economy. Yet Britain has already crashed over its own economic precipice, with the Conservative-led government unleashing a radical experiment in austerity since coming to power in 2010 that has seen public spending corralled and taxes increased on this side of the Atlantic.

Two and a half years into Britain's budget-cutting plan, the world's seventh-largest economy has just emerged from a double-dip recession, and economists warn that a third downturn could be on the way this winter. One of the biggest culprits in a nation gripped by the psychology of austere times: feeble consumer spending that has slammed British "high streets" — think American main streets — and dragged on the national economy.

Consider this hard-hit Welsh city in western Britain, where the shopping district is a shadow of its former self. A litany of chain stores and mom-and-pop shops have gone bust or moved, sending the vacancy rate soaring from 15.7 percent in mid-2010 to nearly 30 percent today. A walk down the city center presents a bleak mix of liquidation sales, pop-up thrift stores and pessimistic merchants mounting meager Christmas displays.

"I was hoping to be reaping the benefits of a life's work by now, heading to Longboat Key, Florida, to retire," said Alan Edwards, proprietor of Vacara's Fish & Chips, which has seen a 20 percent drop in sales over the past two years. Edwards, who is also president of the local chamber of commerce, added: "We just aren't getting the foot traffic anymore. People aren't spending money. They keep watching the telly, hearing only that things are bad, bad, bad, so, of course, they're not going to spend."

Ending binges of credit-fueled spending was one goal in Britain and other nations after the global financial crisis, which began in the United States. But in a country where consumer spending accounts for roughly 60 percent of the economy, parts of this austerity-hit nation outside of thriving London have suffered prolonged bouts of stagnant retail sales. There are fresh indications of improving sentiment and stronger sales this holiday season, suggesting a possible light at the end of the tunnel. But vacancy rates across Britain remain stubbornly high four years after the height of the crisis.

The results here suggest a tough road ahead for Americans as they seek to slash the deficit, whether accelerated by the fiscal cliff or not. A persistently weak economy has depressed tax collections here, slowing months of gains from painful cuts and leading the government to repeatedly fall short of its deficit targets while triggering estimates of years of slow growth ahead. This month, the holy grail of the plan — to begin cutting the national debt by 2016 — was pushed back by at least a year, and achieving it will now require even deeper cuts.

Other indebted European nations, including Greece and Spain, have forcibly adopted austerity to appease international lenders and financial markets, both with devastating economic effects. But no country in Europe shares a closer profile — both economic and cultural — with the United States than Britain.

Bringing with it even harsher austerity than the plan imposed here, the fiscal cliff, economists say, could damage the U.S. economy proportionately more than the battering in Britain. But even if the worst is averted in Washington, the British experience suggests just how difficult the challenges may be for such a large and deeply indebted industrial economy.

"If we assume that the fiscal cliff is avoided, a gradual deficit reduction in our view could still be consistent with an economy recovery," said David Riley, managing director for sovereign ratings at Fitch Ratings in London. "But it's also not a free lunch. There will be headwinds generated by higher taxes and spending cuts, with much riding on how fast they are rolled out."

He added: "If the U.S. follows the same path as Britain, it could end up in recession anyway."

But are things really as bad as most Britons seem to think?

To be sure, as the government has reduced its deficit by a quarter in just 32 months, millions here have seen a real decline in purchasing power from lost public-sector jobs and trimmed state benefits, with even the gainfully employed seeing real wages growing slower at times than the rate of inflation. But the situation in Britain is also not as grim as its poor economic growth numbers suggest.

Despite zigzagging in and out of two recessions, Britain has seen a net increase in jobs over the past two years, with growth in the private sector more than making up for cuts in the government workforce.

Many of those new jobs have been part-time or precarious contract work. But proponents of austerity still herald the relatively robust job market as evidence that cuts have had a more limited impact on the economy than critics allege.

"Now, I know you are asking whether the plan is working," Prime Minister David Cameron told his Conservative Party convention in October. "And here's the truth: The damage was worse than we thought, and it's taking longer than we hoped . . . but we are making progress."

The government has partly blamed the bad economy on external shocks, largely the debt crisis in the euro zone just across the English Channel that has put a lid on British export growth in by far its largest market. Had the government not started to rein in the budget deficit, officials contend, Britain could have lost the backing of investors just as Spain and Italy did, making things here worse.

And things were bad. The Conservative-led coalition came to power after a surge in stimulus spending by the pervious Labor government had made the British budget deficit one of the highest in the industrialized world — $240 billion, or 11 percent of gross domestic product. The new government vowed to eliminate the structural deficit — the part stemming from government operations, or roughly 5 percent of GDP — by 2014. To do that, it increased the national sales tax and accelerated payroll tax hikes, but the focus was squarely on cuts. Since the second quarter of 2010, Britain has shed more than 600,000 state jobs.

At the same time, the weaker-than-projected tax revenues in the down economy has put the government at least two years behind its budget goals, meaning years more of tough cuts to meet strict targets — assuming the economy doesn't magically roar to life.

Here in Newport, an old steel town of 145,000 people on the graceful River Usk, the forces working against the British economy can be seen on the lightly traveled High Street. Newport's city center had banked on a massive new downtown mall to revitalize the area, but its developers lost their financing during the global crisis. In this nation that is struggling to find new sources of investment after rolling back government stimulus, a new developer is on board but has not signed enough prospective tenants to secure financing, according to city spokesman Jonathan Hollins.

Newport has enacted relatively light cuts compared with some other British cities and towns. But even as the national government has sought to roll back state assistance, the number of people claiming unemployment benefits here has edged up from 5.1 percent in May 2010 to 5.8 percent in October, the most recent month for which data were available.

A longtime employee of Britain's passport office, Ben Rapier, 35, was one of the lucky ones. Over the past two years, the Newport branch of the Identity and Passport Service shed half of its 300 jobs. Although he retained his post, Rapier, who is also a local union representative, was left with what he called a diminished sense of job security. It has led him and his wife, a state worker, to cut back on nights out, buy discounted groceries and hold off on starting a family.

"You just don't know what's coming around the corner anymore," he said.

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Eliza Mackintosh contributed to this report.