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Position: Short France (EWQ)


Heading into the G20 this weekend there’s a noticeable rift between Europe and the USA vis-à-vis the issuance of austerity measures to address government budget deficits: many European countries are wearing the proverbial “accountability pants” to address fiscal imbalances while the Obama administration has yet to critically address the government’s excess spending and future obligations. Maybe that’s why Peter Orszag (Obama’s budget director) is leaving.

Yesterday, in an emergency budget speech, UK Chancellor of the Exchequer George Osborne outlined initial go-forward spending cuts and tax-generating measures (in a formula of roughly 80/20) to shave down the country’s budget deficit. Here are the main tenants of the budget:

  • 25% cut in the budgets of government departments starting April 2011 through 2015 (a spending review is expected for released in October)
  • Tax on banks with liabilities greater than £20 Billion (the tax is expected to generate approx. £2 Billion annually)
  • Increase to the Value Added Tax (VAT) from 17.5% to 20% starting January 2011
  • Increase in capital gains tax for higher tax bracket earners, to 28%. No change (18%) for low to middle income earner
  • A 2 year wage freeze for all but the lowest paid among Britain’s 6 million public servants and a 3 year freeze on benefits paid to parents for rearing children
  • Cuts to the housing benefit and disability allowance
  • Decrease in corporate taxes, staggered over 4 years from 28% to 24%

In his speech Osborne stressed that he is “not going to hide the hard choices from the British people”. Obviously managing growth while cutting spending will be a great challenge for the newly elected Cameron government. UK growth is currently estimated by the Treasury for +1.2% this year and +2.3% next year. Interestingly, the emphasis to lower corporate taxes is in direct response to the government’s fear that an unfavorable tax environment would drive corporations out of the UK.  

Noteworthy, following the budget announcement, Germany and France expressed their support for a bank tax. While we don’t expect any concrete policy to come from the G20 this weekend in Toronto, we do expect the talks to surround the UK’s fiscal tightening and the growing rift between Europe’s “action” and Washington’s “inaction” in shoring up budget imbalances. 

As Keith has affectionately stated: a country can kick the can of debt down the road for only so long.  Maybe America will take a hint from the Europeans.

Matthew Hedrick