0

2011

Pace University Neil Joshi

[PAA 644: OXFORD PORTFOLIO ON LOCAL GOVERNMENT AND POLICY IN THE UNITED KINGDOM]

Report Title:

Comparison of the Effects of Fiscal Austerity on Local Governments in the

U.K. and the U.S.:

Neil Joshi PAA Oxford Portfolio

1

Part III: Comparison of the Effects of Fiscal Austerity on Local Governments in the U.K. and the

U.S. :

I.) Introduction:

As the United States and United Kingdom have experienced tough economic times due to the

collapse of the global financial markets during the great recession, fiscal austerity is being employed to

reduce government spending and national debts. It is no surprise therefore, that citizens in both nations

have begun to see the effects of a fiscal austerity financial policy as the delivery of government services

have been either cut entirely or reduced as the budgets on all levels of government have become strained

due to low tax revenues and increasing expenses. Citizens in both nations have had to adjust to this new

reality which is certain to continue in the near future due to the weak economic recovery in both nations.

News stories about budgetary issues have become headline news on a daily basis as citizens and policy-

makers alike raise questions such as on what role should government have in society? What services

should provided by the government? , If not, could certain services or functions of government be

shifted to non-profits or the private sector? These tumultuous times politically, socially, and

economically in both nations has undoubtedly shaped the responsibilities of public administrators in

very complex ways. This paper will discuss the effects of fiscal austerity on local governments in terms

of how various issues on the national stage in both nations are profoundly changing and shaping the

structure and responsibilities of local government.

II.) Fiscal Austerity in the U.K.:

The lecture by Dr. Stuart White titled: Cuts too far? The economics and politics of Fiscal

Austerity in the UK provided us with some excellent insight into the effects of the recent financial crisis

and the slow economic recovery the U.K. has witnessed that touch upon the very heart of government

itself. To begin with, Dr. White first presented a brief budgetary glance on the UK as a whole which he

then compared to some similar statistics relating to the U.S. He stated that the total public spending in

the U.K. as of 2009/10 is cited as £ 686 billion or equivalent to 47% of GDP (White, 2011). The largest

government payments can be broken down as follows: Social Security and Welfare (£194 billion or 28%

of GDP), the National Health Service (£123 billion or 18% of GDP), Education (91 billion pounds or

13% of GDP), Defense (£39.4 billion pounds or 5.7% of GDP), with smaller amounts in areas such as

Public Order and Safety, Transport, Net Debt Interest, Gross Debt Interest, etc (White, 2011).

Historically, the national debt in the U.K. has been much higher than it is currently. For example,

between the years of 1914-20, the national debt went from 26% of GDP to 107% of GDP (White, 2011).

From 1939-46, the national debt increased from 141% to 252% of GDP (White, 2011). Internationally,

the UK national debt is not very high compared to other developed nations. The UK ranked 12th out of

29th among OECD nations in terms of national debt as a percentage of GDP (White, 2011).

In terms of current public spending as a percentage of GDP, public spending in the U.K. in

2009/10 was at 47.4% of GDP (White, 2011). This is the third highest amount of public spending in

terms of GDP after 1948, when the economy of the U.K. began to pull away from the lingering

economic weaknesses from the Second World War. In terms of the percentage of public spending in

comparison to national income, the U.K. falls in the middle of the pack compared to other developed

nations at 51%. The corresponding figure for the U.S. is 42.2%, at the lower end of the spectrum (White,

2011). The U.K.’s public spending is more than certain nations like the U.S., Canada, or Japan because

provides numerous public services such as the NHS to their people and it’s economy has more elements

of socialism but not as much socialism as Germany or the Scandinavian nations. The UK, as a unitary

Neil Joshi PAA Oxford Portfolio

2

state is also more centralized than the U.S. with greater power concentrated at the national level of

government. In fact, the national government accounts for 70 percent of total government spending in

Britain, compared with 55 percent in the U.S., 35 percent in Japan and 20 percent in Germany (Lucas,

2011).

On a national level, the budget deficit in the U.K. which reached a peak of £ 156.5 billion (11%

of the GDP) in 2009/10 pales in comparison to the U.S. whose budget deficit for FY 2011 alone has

been projected at $ 1.6 trillion (White, 2011). However this fact alone ignores the reality of the fiscal

problems on the national level. The national debt in the U.K. has been growing since FY 2002/03 along

with the deficit as a percent of GDP and public sector held net debt as percentage of GDP. This reflects

a reduction in tax revenue, bailouts for financial institutions, and increasing costs of health care services

in recent years. A similar phenomenon has occurred in the U.S. as well.

As a result of the current economic reality in Britain as shown by these dismal statistics, there are

three deficit reduction plans that have been proposed at the national level. These deficit reduction plans

which range from plan 1 (Labour) to Plan 3 (coalition) can be briefly summed up as follows. Moving

from the Labour party plan to the Coalition plan the overall squeeze on the budgets range from £ 70

billion to £ 110 billion over five years, which consist of increased taxes (ranging from £ 21.5 billion to £

29.8 billion) and the remainder in spending cuts (ranging from £ 50.9 to £ 80.5) (White, 2011).The result

of these plans indicate a tough squeeze on public service spending and job benefits for public employees

in the near future. The Coalition plan from 2011 onwards has been deemed the tightest five-year period

for public spending since the Second World War (White, 2011). Internationally, out of 29 OECD

nations, the IMF forecasts that only Iceland and Ireland, which each have their own severe economic

crisis, will see steeper cuts to public spending as a share of national income than the U.K. (White, 2011)

Having provided the overall budgetary picture on the national level, the next part of this paper

will discuss the allocation of public spending cuts and the impact on the budgets of local governments in

Britain. Not surprisingly, due to the steep nature of any public sector spending cuts, there will be a

decline overall for various government departments from FY 2010-11 to 2014/15. For the time being,

the coalition has avoided cuts to the NHS program with only a 0.2% decline in spending for this

program in the coming years. At the same time, various areas of government spending such as Education

(11.4%), Transport (-15.1%), Culture (-21.6%), Business Innovation and Skills (-29%), Home

Office/Justice (-25.8%), and the Environment, Food, and Rural Affairs (-31.3%) are projected to witness

very steep cuts to their budgets (White, 2011). The NHS as mentioned above has been spared or ring-

fenced from cuts, but there are proposals for efficiency savings of £15 - £20 billion to be found in the

coming years (White, 2011). The NHS is looking to pushing more responsibility on local governments

to compensate (White, 2011). The planned cuts to education have caused a great deal of ire and

controversy nationwide, with the biggest cuts being felt by local government capital budgets as well as

in higher tuitions, reduced loan funding, and declines in funding for humanities and social sciences

programs for higher education (White, 2011). In fact, across England, more than three-quarters of

universities in England have seen budgets cut in 2010, some by nearly 14% (Shepard, 2010). Such

cutbacks have caused warnings of larger class sizes, further job cuts and deterioration in the quality of

courses (White, 2011). The universities of Oxford and Cambridge are among 99 institutions nationwide

forced to cope with reduced state funding for the current academic year through the Higher Education

Funding Council for England (Hefce) which is charged with distributing these monies to them (Shepard,

2010). Oxford and Cambridge universities have seen their overall budgets reduced by 1% and 1.9%

respectively, although this is mainly because a grant of £40m to preserve historic buildings has been

Neil Joshi PAA Oxford Portfolio

3

withdrawn (Shepard, 2010). The total amount of money distributed by Hefce comes out to £7.36bn in

state funds for 130 universities and colleges for their teaching, research and building projects, which

represents a 3.6% real-term drop on the sum awarded for this academic year (Shepard, 2010). To make

matters worse, these cuts also come as record numbers apply for university (Shepard, 2010).

Other examples on the national level with widespread implications include the freezing of the

child benefits at current rates and being withdrawn completely from higher tax payers; cuts to housing

benefits that are intended for making housing more affordable for those in need by setting Housing

Benefit rates at the 30th percentile of local rents (not median rates) and placing a cap on total HB a

household can receive by bedroom size; benefits for public sector employees being indexed to the

Consumer price index which rises at a slower rate than the retail price index, thereby making it more

difficult for these benefits to keep up with cost of living increases; tougher eligibility tests for Disability

Living Allowance to reduce claims by 20% (White, 2011). Because of the fact that the other nations of

Britain: Scotland, Wales, and Northern Ireland are funded by block grants the impact of future spending

cuts in these nations is quite different than England, though these nations have also seen steep

government spending cuts as well (White, 2011).

The question of whether government spending cuts are necessary is at the center of a deeply

controversial debate in both nations. Proponents such as the Coalition government in the U.K. or the

Republican Party in the U.S. who reason that it is better to cut the deficit sooner than later to avoid a

larger burden on successive generations of citizens, reduce excess spending rather than risk the

economic well-being of the nation through higher taxes and thereby scale back dependency on the

public sector, and create opportunities for economic growth for the private sector (White, 2011). Critics,

while admitting that government deficits need to be reduced, contend that the rapid pace of making large

cuts could trigger an economic crisis such as double-dip recession, because the private sector may not be

ready to take on a greater economic burden in replacing jobs lost or reduced service provision in the

public sector in addition to the jobs being shed due to a weak economy as well as reduced consumer

spending which is a crucial component for economic growth in both nations (White, 2011). Also, the

cuts in government spending in many cases have fallen upon the individuals and municipalities that have

been affected the most by the great recession, depriving them of crucial services and/or revenue which

place further stress upon a weak economy at a crucial time, when economic growth is needed (White,

2011).

On a national level, more than 132,000 jobs were lost in Britain from the public sector in 2010

according to the latest figures which show job cuts across central and local government picking up steam

(Curtis, 2011). Of those jobs, some 45,000 public sector jobs were lost in the last three months of 2010

including 32,000 in schools and colleges (Curtis, 2011). The figures are partly attributed to the

government's recruitment freeze but the increasing pace suggests that the coalition's government

spending cuts are beginning to translate into job losses (Curtis, 2011). Another 170,000 local

government workers have been issued with 'at risk' notices, which will still take some months to

translate into terminations which comes as every government department currently has a target to cut at

least 30% of its central costs by 2015 (Curtis, 2011). The declining employment in the public sector has

contributed to the 2.53 million unemployed people in Britain, though the private sector is picking up

slightly and off-setting some of the public sector redundancies citing a 77,000 rise in jobs from non-state

employers (Curtis, 2011). As the job cuts in local governments increase, communities lose essential

services such as home care, day-care centers, and libraries and local businesses lose the spending power

of council workers (Curtis, 2011).

Neil Joshi PAA Oxford Portfolio

4

III.) Impact on Oxfordshire County and the City of Oxford:

For local governments the effects of fiscal austerity have been very profound, causing dramatic

social changes. During our brief visit to Oxford, we were provided with a meaningful glimpse of the

scale of spending cuts being made and the residents of both the city of Oxford and the Oxfordshire

County have been affected or will be impacted by such severe cuts on many different levels in their

daily lives.

Earlier this year, we learned that Oxfordshire County enacted plans to save £ 119 million over

the next four years, with £ 55 million of that amount being obtained through savings for this year,

despite efforts to even out the impacts of the cuts across society (BBC News, 2011). Those savings are

the result of a mix staff cuts, pay freezes, management restructuring, and reducing costs. As a result of

the cuts, adult social care will be cut by £37m, cost savings of £4m will come from youth services which

will see as many as 20 of their facilities closed, half of the streetlights will be turned off during early

morning hours, several waste disposal sites such as recycling centers and landfills closed, and up to

twenty of the 43 county council-run libraries could be closed (BBC News, 2011) (BBC News, 2010).

There is £52 million in funding cuts to be made in the regional police force, the Thames Valley Police

Force, that serves Oxfordshire, Berkshire, and Buckinghamshire counties (Oxford Student, 2011). These

cuts are set to be made over the next three to four years, provoking concern that police services in the

city of Oxford could be seriously diminished by the independent Police Authority that governs the

police force (Oxford Student, 2011). However, there are real fears that the budget cuts, which constitute

about one-seventh of the Force’s annual budget, could materially affect police jobs and their presence

throughout Oxfordshire, Berkshire and Buckinghamshire, with the Oxford Mail claiming that over 300

jobs are threatened (Oxford Student, 2011). In fact, the Thames Valley Police, however, have seen a ten

percent rise in recorded crime over the last year, according to a Home Office crime report, more than

many other police forces throughout the country, and thus these cuts come at what is potentially a bad

time, a sentiment that has been echoed in many cities in the U.S. as well (Oxford Student, 2011). In

addition, the transportation to day centers for the elderly will halt and subsidies for vital bus routes will

be scaled back. Only the county fire service and child protection service escaped the harm. As a result of

lack of government help over the next year, the council tax is set to rise as the county’s share of the bill

will rise by 2.5 per cent (2012/13) and then 3.75 per cent (2013/14). There are plans for about 1,000 job

before 2015 across the whole county council as part of the county council efforts to save between

£155m and £203m in the run up to 2015 (BBC News, 2010). Last October, Chancellor George Osborne

said in the government's Spending Review that local authority funding would be cut by 28.4% by 2015

from current levels (BBC News, 2010).

Even the Oxford City Council earlier this year, enacted £9m worth of cuts over the next four

years. Councillors approved a budget of £25.7m in the 2011-12 fiscal years in response to funding from

central Government being slashed by 25 per cent over the next two years (Buratta, City council backs

big fees rise as £9m cuts package agreed , 2011). These cuts will be felt across a range of services, with

up to 100 council jobs facing layoffs (Buratta, City council backs big fees rise as £9m cuts package

agreed , 2011). To reduce costs senior management and councillors have agreed to a pay freeze, and city

staff will not receive annual pay rises (Buratta, City council backs big fees rise as £9m cuts package

agreed , 2011). Proposals for increased fees for parking, recreational activities, and pest control will be

implemented. A new £35 fee for collecting garden waste was introduced at the same time that funding

for street wardens and planning enforcement will be reduced (Buratta, City council backs big fees rise as

£9m cuts package agreed , 2011).

Neil Joshi PAA Oxford Portfolio

5

Our discussion with the Oxfordshire County government informed us of several recent actions

and trends in local government in Britain. One trend has been a shift from regional monitoring of

policies in favor of monitoring policies at the local level that incorporate risk management and increased

customer contact services to evaluate performance, increase contact with the public, and identify trouble

spots in the delivery of public services. This is particularly true for county councils which have regained

a position of importance in local government during this shift from regional government organizations.

As for regional level organizations, we were informed during our lecture that currently there are few left.

Instead, Limited Economic Partnerships (LEP) have emerged in their place. These organizations are

operated across multiple counties to promote inter-organizational cooperation in tackling various policy

issues. There are naturally questions in the long term about whether these successors to regional

government will work and whether they can be more effective in providing services and creating policy.

It is part of a decades old debate, which has been brought up again due to the fiscal austerity in the UK.

The national government also hopes that more local level and community control provides a more

favorable climate for social enterprises, like the Oxfordshire Rural Community Commission fuel

provision scheme to serve local needs. However, this aspiration hinges upon whether ordinary citizens

will want to volunteer their time and efforts, when people themselves have many competing priorities in

their lives. If not will community service become a mandatory requirement when people have many

competing priorities. Because there is a lack of a centralized job corps to mobilize community action

like in the U.S. like AmeriCorps on the national level with the ability to mobilize groups of people to

conduct activities that help the community, presents an added hurdle to success of such as strategy in the

long-term.

Another trend is that since May 2010, previous inspection frameworks that were devised and

implemented by the audit commission have been abolished in favor of gathering performance data from

self-evaluation or peer-evaluation by departments, though the audit inspection framework still exists for

school evaluations. These methods are now widely employed by a variety of county offices and usage in

recent years, particularly in the past year since the coalition government has been in power at the

national level has grown. County officials told us that they were studying future possibilities of

conducting this sort of work on an intra-organizational level while continuing to seek efficiency savings

to help meet community needs due to reduced funding for local government budgets and the need to

maximize service provision.

A key initiative that is in line with vision of a Big Society being fostered by the national

government is changing the very form of local government. This initiative is the creation of a £600,000

community projects program designed to help community groups undertake projects. This program

includes developing monitoring frameworks to gauge progress by quarter while assessing risks, creation

of project registers (i.e. short-term projects), and the inclusion of a corporate proposal for county

management teams which are to be discussed at informal meetings and closed to the public because the

council business strategy is not to be reported to the public. In addition, the recent localism bill going

through parliament contains elements that include propose creation of neighborhood planning and forum

and legislation to allow for community rights to build, buy, and challenge development to increase

community involvement. There is a £57 million provision to support voluntary and community

organizations that are trying to build closer relationships between parish and town councils. Due to such

radical restructuring of government being either proposed or implemented there are serious questions of

about the viability and effectiveness of such community based movements in addition to developing

frameworks to monitor their activities in keeping with the county government tradition of transparency

that comes with a more bottom-up approach to governance. For example, it was mentioned that the

Neil Joshi PAA Oxford Portfolio

6

central government will maintain accountability by calling for reporting of expenses over £500 that can

be found in publicly accessible reports but it remains to be seen how effective such measures will be or

what measures specifically need to be developed in this regard.

The basis of these trends reflect the Coalition government’s vision for a “Big Society” which is

gradually transforming British government and society at large. The effects of this program will have on

the long-term future of Britain is to be determined, in spite of whatever promise it may hold in the

creation of more effective delivery of public services. For example, a recent Economist article provides

insight into the current state of the “Big Society” program. The article cites an example of a newly

created Paddington Development Trust in London, which is a real example of what the coalition

government seeks to achieve with their vision of future government. The Paddington Development Trust

(PDT), teeming with community life. This institution contains a studio are tailor’s dummies, used by a

group of vulnerable teenage girls learning fashion and beauty tips (The Economist, 2011). Elsewhere,

space is rented to a computer class, which attracts ethnic-minority students from the housing estates and

space for visitors study planning applications, with staff on hand to help (The Economist, 2011).

Proponents of the Big Society, which include much of the Coalition government, favor using voluntary

and co-operative organizations that can be thought of as “little platoons” to drive social change (The

Economist, 2011). Proponents cite the fact that economies of scale and experience make big private

providers preferable and more competent in delivering government services because of the fact that the

private sector can replicate successes and squeeze out cost when budgets are constrained (The

Economist, 2011). After all, the political underpinning of the current coalition government lies in the

fact that both the Liberal Democrats and Conservatives share similar ideologies in terms of public

service reform (The Economist, 2011). In general, Liberal Democrats favor local accountability while

Conservatives hate the inefficiencies of the state, so an emphasis on grass-roots change appeals to both

(The Economist, 2011).

While the PDT may represent David Cameron’s commitment to more localism in government

provision of services which would once have been confined to their separate institutions, a recent

government white paper raises concerns about deep problems with the localism approach (The

Economist, 2011). The paper even goes so far as to say that depending on how these problems are

resolved may well define Mr. Cameron’s success or failure in office, a very real possibility in these

uncertain times (The Economist, 2011). For example, the Conservatives and Liberal Democrats differ

widely on how much for-profit innovation they will tolerate and by extension how much private firms

should be encouraged to challenge state providers (The Economist, 2011). The recent news of the

financial collapse of Southern Cross, a private chain of care homes for the elderly, has raised the

question of what the government’s responsibility is when outsourced services go wrong (The Economist,

2011). While it may be intuitive for some to believe that poorly run services should simply be allowed to

go bust, such actions can be regarded as politically embarrassing to the current government. As a result,

the role of the private sector in the plans is unclear, even though the government insists it is “neutral”

between providers, and that there should be no ideological drive towards using the private sector over

state monopolies (The Economist, 2011). The white paper has been criticized for a lack of focus placed

on targeting reforms involving specific providers and key policy areas while being more ideologically

driven (The Economist, 2011). The white paper reflects a prevailing conservative thought in believing

that if people are given enough information, they will find ways themselves to demand improvements

and change things for the better meaning that more data on the quality of services, the outcomes of local

court cases and transport efficiency, and crime maps will be published to hold public officials

Neil Joshi PAA Oxford Portfolio

7

accountable for their actions and spur reforms or even allocate resources given to them to undertake

their own priorities rather than a uniform set of rules or procedures (The Economist, 2011).

While such ideas seem good on paper, critics charge that such planning behind the “Big Society’

lacks sufficient detail and does not sufficiently take the lead in driving radical social change, not to

mention the fact that the wide scale changes to delivery of public services might take years to fully

implement (The Economist, 2011). The coalition’s tense internal politics plus a desire to constrain

public-sector anger in the face of budget cuts indicate that leaders want to avoid confrontation. The

latest initiatives seek to “put power in people’s hands”, but do not lay out a clear plan to how trim

government, encourage the private sector to pick up the slack, and still promote economic growth (The

Economist, 2011). This is why in the view of critics; the “Big Society” will go down as another chapter

in modern British history but is unlikely to cause the widespread transformation that proponents intend.

Ironically, in fact, the public spending cuts can be an unintended detriment to the concept of a

community driven policy action. For example, a recent news article reports complaints by volunteers in

Oxfordshire who provide public services decrying the lack of funding that may prevent them from doing

their jobs (Buratta, Cuts undermine Oxfordshire's `Big Society', 2011). The article identified a volunteer

run youth club run on Oxford’s Wood Farm Estate that may lose their paid youth workers due to the

spending cuts made by the Oxfordshire County council, potentially shutting down their operations

(Buratta, Cuts undermine Oxfordshire's `Big Society', 2011).

IV.) Fiscal Austerity in the United States:

Fiscal austerity has been observed on all levels of government in the U.S as well because both

nations are in an “age of austerity” as a result of the magnitude of the Great Recession, in large part due

to the reduction of tax revenues compared to before the recession started (Lucas, 2011). Although tax

receipts began rising steadily increasing after the recession ended in mid-2009, several recent trends in

2011 have resulted in slowdown of economic growth, creating new fears of a double-dip recession. The

U.S. economy grew at 1.3% annual pace in the second quarter of 2011 due to weakening consumer

spending and business investment, the U.S. government debt, and the fact that federal stimulus funds

have dried up, thus forcing state and local governments to implement larger austerity measures to cope

with their heavy financial burdens during a weak economic recovery (The Economist, 2011). However,

the main drag on the economy has been government austerity measures, which have reduced growth by

as much as 1.23 percentage points with about 0.41 percentage points due to the state and local cuts and

the remainder due to declining defense spending (The Economist, 2011). In fact, the government has

contributed negatively to economic growth for five of the last seven quarters (The Economist, 2011).

Furthermore, there is even evidence that indicates that the recession was substantially worse than

previously understood, which has left America in a bigger hole than once believed. The Bureau of

Economic Analysis revised its national accounts numbers back to 2007 for their latest release. From

2007 to 2010, real output declined by 0.3% per year on average compared to previous calculations of

annual growth of 0.1% over that period (The Economist, 2011). In 2008, the economy shrank 0.3%,

rather than holding flat, as earlier estimated. In 2009, the economy shrank 3.5%, worse than the earlier

2.6% projection (The Economist, 2011). During the ugliest months of the crisis, in the fourth quarter of

2008 and the first quarter of 2009, output declined at a shocking 8.9% and 6.7% annual pace,

respectively (The Economist, 2011). The new calculations show that like the U.K., the American

economy has yet to reach its previous peak in real output, achieved three full years ago. Recent

economic data as well as ominous warnings from leading economists prove greater merit behind the

concern that immediate austerity during a feeble economy would be mistake (The Economist, 2011).

Neil Joshi PAA Oxford Portfolio

8

There remain concerns even with a deal on raising the U.S. debt ceiling that the cutbacks to current

spending on the national level could continue to hamper growth needed for a full economic recovery.

Economic reports show that nearly 100,000 local government employees have lost their jobs so far this

year, and some 464,000 have found themselves jobless since local government employment peaked in

September 2008. Meanwhile, private sector employers have slowly added jobs (Baden, 2011). Since

March 2010, when private sector employment rose for the first time in more than two years, private

employers have added about two million employees to their payrolls (Baden, 2011). The prognosis for

public sector jobs is expected to remain a drag on overall job growth in the months and even years to

come. This is because despite all the layoffs over the past few years, the public sector still has 7 percent

more workers than it had at the beginning of 2000 (Baden, 2011). In contrast, the private sector, has

about 1 percent fewer jobs. It is possible that state and local governments are to cut between 800,000 to

one million jobs during the next fiscal year (Baden, 2011).

Unlike the U.K., which has been a traditional unitary state, with a strong center, the individual

states in the U.S. play a more active role in governance over their jurisdictions and a larger role in the

provision of local services, because states are entrusted with powers not expressly granted to the federal

government (Lucas, 2011). This sharing of power means that states play a major role in education,

health-care, and transportation among other areas. There are about 90,000 local government authorities

underneath the state level which include municipalities and those districts that undertake special tasks

like water, schools, and hospitals (Lucas, 2011). There are far more government employees at the local

level, with about 14 million of the nearly 22 million public sector workers in the nation (Lucas, 2011).

Taxes such as personal income tax, corporate tax, sales tax, property taxes, etc. account for most of the

financial resources of state and local governments for about 62% of overall revenues in 2010 (Lucas,

2011). Inter government transfers from the federal government account for a substantial proportion of

budget resources, averaging 21% of state revenues since 2000 and growing (Lucas, 2011).

According to the National Association of State Budget Officers (NASBO), the two largest

expenses that accounted for half of their overall expenditures were Education and Medicare, both of

which have seen severe spending cuts (Lucas, 2011). In 2010, states appropriated about 30% of their

spending to education and roughly 22% on Medicaid which covers the health-care costs of the lowest

income households and the handicapped and is co-financed by the federal government and the states

(Lucas, 2011).

The examples of the effects of fiscal austerity on local governments in this paper are focused on

examples in New Jersey, though in many ways these effects are being echoed across the nation. In

regards to the $ 2.1 trillion deficit agreement over the next decade in exchange for raising the debt

ceiling, consequences will trickle down to the local level during the current time where there is 9.5%

unemployment, revenue shortfalls, and flat job growth in the state (Rizzo, N.J. residents will be hurt

regardless of outcome of debt ceiling talks, analysts warn, 2011). Most economists agree the economic

shock of the spending cuts themselves or a downgrade in the U.S. credit rating or both, could result in

the stock market would falter, home values would decline, retirement savings would take a hit, pension

funds could see their investments dwindle, and the cost of borrowing would surge for people applying

for mortgages or credit cards as well as governments seeking to finance transportation projects or school

construction (Rizzo, N.J. residents will be hurt regardless of outcome of debt ceiling talks, analysts

warn, 2011). This could be bad for states if they cannot access the credit markets, or they’re paying

more to borrow, they’ll postpone these projects and essentially postpone the kind of activities that might

help the economic recovery (Rizzo, N.J. residents will be hurt regardless of outcome of debt ceiling

talks, analysts warn, 2011). The federal spending cuts could even force New Jersey to revisit the

approximately $30 billion budget that was passed last month. New Jersey like other states was relies

Neil Joshi PAA Oxford Portfolio

9

upon the federal money, but even after a debt deal that was signed, nobody really knows what those cuts

might look like yet (Rizzo, N.J. residents will be hurt regardless of outcome of debt ceiling talks,

analysts warn, 2011). Fortunately, the state, which is expecting about $12 billion in federal revenue this

year, is in a good position to absorb that shock, because New Jersey does not rely on federal funds as

much as other states and many state agencies have been developing contingency plans (Rizzo, N.J.

residents will be hurt regardless of outcome of debt ceiling talks, analysts warn, 2011). Even still, many

of the cutbacks being proposed by both sides would target education, transportation and health-care

costs. The state, for example, might be forced to pay even more for Medicaid which is already the

biggest budgetary expense (Rizzo, N.J. residents will be hurt regardless of outcome of debt ceiling talks,

analysts warn, 2011).

Fiscal Austerity has had local impacts as the concerns about an increase in violence and crime

due to the reduced government funding have manifested itself in the spike in crime in New Jersey cities

like Newark and Camden, due to police layoffs last year that cut one-third and half of the police force in

those respective cities. In Newark, within months after more than 160 of its police officers the city has

seen an uncontrollable rise in crime including the recent killings of two policemen and an instance

where in one day when 13 people were shot, one fatally (Braun, 2011).

While there is no conclusive data linking crime rates with police layoffs in those cities, it is very

likely that such spending cuts have played a major role in the breakdown of social order (Braun, 2011).

The U.S. Justice Department issued a study warning local police agencies they must prepare for a new

time warning that drastic budget declines are here to stay in their “Strategic Cutback Management”

report concluding that the situations playing out in these cities as well as others across the nation “is

likely to get worse before it gets better (Braun, 2011)."

In particular, the current situation involving state obligations to Medicaid is a very interesting

case study in fiscal austerity. During the depths of the recession, two years ago, the Obama

administration injected billions of dollars into Medicaid, the nation’s low-income health program. With

that money running out benefits are in the process of being cut for millions of people, even though the

number of beneficiaries has increased (Pear, 2011). From New Jersey to California, state officials are

bracing for the end to more than $90 billion in federal monies specifically designated for Medicaid

(Pear, 2011). To hold down costs, states are cutting Medicaid payments to doctors and hospitals,

limiting benefits for Medicaid recipients, reducing the scope of covered services, requiring beneficiaries

to pay larger co-payments and expanding the use of managed care (Pear, 2011). In New Jersey, Gov.

Chris Christie has proposed legislation that would tighten eligibility, reduce Medicaid payment rates for

nursing homes, move older and disabled Medicaid recipients into managed care, and charge co-

payments for medical day care services (Pear, 2011). As a result, costs are expected to rise in other parts

of the health care system. For example, cuts in Medicaid payments to doctors, make it more likely that

they will turn away Medicaid patients and more likely that patients will turn to hospital emergency

rooms for care (Pear, 2011). Hospitals and other health care providers often try to make up for the loss

of Medicaid revenue by increasing charges to other patients, including those with private insurance

(Pear, 2011). Overall, the Congressional Budget Office estimates that federal Medicaid spending will

decline in 2012 for only the second time in the 46-year history of the program resulting in states having

to spend more on Medicaid as they struggle to make up for the loss of federal money (Pear, 2011). The

additional money through the stimulus program raised the average federal share of Medicaid spending

nationwide to 67 percent, but with lack of continued funds the federal share of funding for this program

will revert to 57 percent next month (Pear, 2011).

Neil Joshi PAA Oxford Portfolio

10

Similar to the situation involving England’s colleges, a number of states have drastically cut

back on education funding for higher education. New Jersey Governor, Chris Christie, recently

eliminated $55 million in college tuition grants, mostly for low-income students; from his recent budget

(Rizzo, N.J. public colleges' loss of $55M in funding will hurt opportunity and affordability, schools

say, 2011). Like in England, such cutbacks likely will result in a setback for an affordable education for

the public as a whole (Rizzo, N.J. public colleges' loss of $55M in funding will hurt opportunity and

affordability, schools say, 2011). To make matters worse, the federal government is also debating

similar cuts in college funding for low-income students, particularly Pell grants (Rizzo, N.J. public

colleges' loss of $55M in funding will hurt opportunity and affordability, schools say, 2011). This comes

even though a higher education task force led by former Gov. Thomas H. Kean has been recommending

more funding, not less, for this fiscal year, since the state's colleges have lacked funding increases for

years (Rizzo, N.J. public colleges' loss of $55M in funding will hurt opportunity and affordability,

schools say, 2011).

Although, there is nothing that is comparable to a “Big Society” blueprint on the same scale and

magnitude at the national level in the U.S., there have been greater attempts to boost cooperation in

delivering public services at the local level of government for the sake of cost-efficiency. For example,

the city of Camden, recently reached an agreement with county officials to form a new, regional police

force that could be a cost-saving model for the rest of the state (Baxter & Megerian, 2011). Plans will be

submitted for review to the State by Sept. 30. Under the agreement, the city agrees to share all police

budget information, crime response statistics, crime data and personnel records of all current and laid off

police officers (Baxter & Megerian, 2011). Like the “Big Society”, the success in transforming society

and being an effective alternative to existing methods of governance need further details and

clarification and whose exact effects are yet to be determined.

V.) Conclusion:

In conclusion, as a result of the Great Recession of 2007-09 and the continued weak economic

growth in both nations, governments at all levels have had to undertake severe austerity measures. These

cuts touch the very heart of governance as it has stirred debate over what services are necessary what

services should the government should provide, and the very role of government in the lives of citizens.

With the barrage of daily headlines describing fiscal austerity measures such as pension reform, tax

hikes, service cuts, freezing the salary and hiring of personnel, terminations, etc. and the wide scale in

which such measures are taken it seems as though nothing is truly spared from austerity and that sacred

cows, be it defense or social benefits/entitlements have no room in today’s political discussion. Indeed,

an age of austerity persists in much of the developed world, not simply exclusive to the U.S. or the U.K.

and we as a societies living under the grip of austerity must rise to deal with the challenges before us in

order to improve our societies for the long-term.

Serious debates remain over what direction both of these nations should undertake and how to

maintain economic growth while coping with heavy amounts of public debt, for too often in the past we

have lived beyond our means. The austerity we face provides the peoples and policy-makers of both of

these nations the opportunity for greatness, as both of these nations, the U.S. and the U.K., emerged

many years ago from the Great Depression and the Second World War, though obviously, the Second

World War caused great physical and economic destruction in the latter nation, which was an added

challenge that the U.S. largely escaped. Unfortunately, very often these spending cuts that policy-

makers have implemented have created additional economic burden on the poorest and neediest

residents as many of the above examples and statistics attest. Many communities in both nations have

Neil Joshi PAA Oxford Portfolio

11

been further shaken by such steep cuts as there are fewer opportunities for social mobility and care in

terms of adequate education, healthcare, and employment for the poor and middle classes. The question

of what are the best methods to even out the social pain and ills inflicted on society because of austerity

measures elude policy-makers and remain a looming challenge. Recent economic data that reflects the

weak economy has verified the fact that the loss of public sector employment is a factor that has a

substantial drag on the economy in both nations. Policy-makers continue to grapple with devising new

more cost-efficient and effective methods for provision of public services that have emerged as new

trends in governance. In the U.K., David Cameron is undertaking a bold gamble with his vision of a

“Big Society” that includes more localized control over policy-making and funding social programs with

a reduced dependence on the public sector for delivery of essential services in favor of community-

centered volunteer, non-profit, and for profit businesses that contribute to provision of services. There

remain serious questions even among proponents in terms of the level of detail needed to ensure these

people receive the funding, information, and support they may require while maintaining records for

these community groups to be held accountable for their actions and uphold the transparency and

communication that the British public has come to expect from their government officials. Because this

is a very bold experiment in the U.K., there are no previous guidelines to rely upon and such

fundamental questions and concerns still will need to be addressed for the “Big Society” to have a

measure of success. In the U.S. , policy-makers share similar concerns about improving the cost-

efficiency and effectiveness of the delivery of public services, as well as how to balance spending cuts in

a reasonably fair manner and have shown a willingness to consider different alternatives to governance.

The example of the new Camden county police department was cited as an example of how local

governments are seeking to foster broader cooperation in the provision of public services. Despite the

different structures and operation of government (unitary v. federalist), the relative sizes of public debt,

national budgets, deficits, etc. the effects of fiscal austerity are very much the same in both nations and

share many common characteristics in how they have provided impetus for undertaking government

reforms, particularly in dealing with debts, and opportunities for local governments in both nations to

shape the future contours of society. The pain of brought about by austerity is very similar between the

two nations.

Bibliography

Baden, B. (2011, July 8). Public Sector Job Cuts Threaten Recovery. U.S. News & World Report .

Baxter, C., & Megerian, C. (2011, August 2). Pact would create a Camden regional police force. Newark Star

Ledger .

BBC News. (2010, November 26). Axe may fall on half of Oxfordshire's council libraries . BBC News .

BBC News. (2011, February 16). Oxfordshire county councillors back £119m of savings . BBC News .

Braun, R. (2011, August 1). Newark's violence points to cop layoffs, breakdown in values. Newark Star-Ledger .

Buratta, C. (2011, February 16). Black Day as County agrees to 119m cuts. Oxford Mail .

Buratta, C. (2011, February 22). City council backs big fees rise as £9m cuts package agreed . Oxford Times .

Buratta, C. (2011, February 15). Cuts undermine Oxfordshire's `Big Society'. Oxford Times .

Curtis, P. (2011, March 16). Public Sector Job Cuts top 132,000. The Guardian .

Neil Joshi PAA Oxford Portfolio

12

Lucas, J. M. (2011). US State and Local GovernmentFinances: from Recession toAusterity.

Oxford Student. (2011, January 19). Thames Valley Police Feel the Cut. Oxford Student .

Pear, R. (2011, June 15). As Number of Medicaid Patients Goes Up, Their Benefits Are About to Drop. New York

Times .

Rizzo, S. (2011, July 1). N.J. public colleges' loss of $55M in funding will hurt opportunity and affordability,

schools say. Newark Star Ledger .

Rizzo, S. (2011, July 28). N.J. residents will be hurt regardless of outcome of debt ceiling talks, analysts warn.

The Newark Star-Ledger .

Shepard, J. (2010, March 18). University Budgets to be Slashed by up to 14%. The Guardian .

Sumner, R. (2011, February 23). City Council pushes ahead with budget cuts package. Oxford Journal .

The Economist. (2011, July 29). America's Economy: Distress Signal. The Economist .

The Economist. (2011, July 14). Reshaping the State: Little Platoons on a Slow March. The Economist .

White, S. (2011, July 4). Cuts Too Far? The Economics and Politics of Fiscal Austerity in the U.K. Oxford.