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Britain's brave, bold and risky experiment

A truck displaying the United Kingdom's national debt drives around Parliament Square on June 22.
A truck displaying the United Kingdom's national debt drives around Parliament Square on June 22.
STORY HIGHLIGHTS
  • Britain's aggressive plan to cut its deficit is a bold but risky move, says Fareed Zakaria
  • The coalition government has announced plans but they haven't gone into effect, he says
  • Zakaria: Question is will it restore business confidence or cause recession
  • He says GOP should take note of how Cameron is modernizing the Conservative Party

Editor's note: Fareed Zakaria is an author and foreign affairs analyst who hosts "Fareed Zakaria GPS" on CNN U.S. on Sundays at 10 a.m. and 1 p.m. ET and CNN International at 2 and 10 p.m. Central European Time / 5 p.m. Abu Dhabi / 9 p.m. Hong Kong.

London, England (CNN) -- Britain's new coalition government has embarked on a budget-deficit cutting strategy that is bold, brave and potentially very risky, says analyst Fareed Zakaria.

It could turn out to be a model for the United States to follow -- or a prime example of what not to do in the wake of a severe recession.

After forming a government in the wake of the May election, the ruling coalition of Conservatives and Liberal Democrats announced plans last month to cut spending and raise taxes in an effort to reduce the budget deficit.

Zakaria, the author and host of CNN's "Fareed Zakaria GPS" spoke to CNN on Wednesday from London. Here is an edited transcript:

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CNN: The new coalition government in Britain has announced major steps to cut the budget deficit. What has the impact been?

Fareed Zakaria: In general, I'd say the government is benefiting from having announced these cuts. There's a sense that they're being bold, they're being brave, they're taking on a big challenge. It particularly helps them that you have this coalition government, so the fact that the Liberal Democrats, who are really quite a left-wing party, are supporting the budget has given Conservatives more cover. ...

It's important to remember that it's not just budget cuts, it's also tax raises. You have to give them credit for being serious about this. It is not pure ideology as with the right in the United States. They understand that if you're going to do something serious about the budget deficit, you've got to do both spending cuts and tax increases .There's simply no way for the math to work without doing that.

Now, on the political side though, these changes have not come into effect yet. So there are two big questions, what happens economically when these budget cuts start going into effect and what happens politically -- how popular does the government remain at that point? But the biggest question is what happens economically.

CNN: Is it too soon to take these steps as the world is coming out of a big recession, and government spending is seen as a way to speed the recovery from a recession?

Zakaria: The crucial question here is about timing, and very few people would disagree that Britain had to get its public finances in order. There's a universal sense that the last Labour government spent too much money and borrowed too much money. But in the midst of a very weak economic recovery, does it make sense to slash spending, raise taxes, all of which will have the effect of putting some people out of work and reducing people's spending power.

Here's the debate -- one side says that will reassure markets, that will bring interest rates on things like mortgages even lower, and that will give businesses confidence to invest, and the other side says once you inflict that much pain on the economy, people are going to spend less as people lose jobs or are taxed more heavily, which will cause an even more severe downturn.

CNN: What does this mean for the rest of the world?

Zakaria: Britain is the guinea pig here. We're all going to watch the outcome very closely because President Obama has taken a position in this debate.

He told the G-20 countries, which includes Britain of course, that it is too soon to start withdrawing the stimulus measures. Britain is going further than withdrawing the stimulus measures, it's actually cutting spending.

The big debate is over what will restore business confidence and what will make businesses start spending again. Because everyone agrees that government spending is only a bridge to business spending. At some point business has to start spending again.

I'm pretty persuaded that the timing on this is bad. I think it would have made more sense to wait at least six months, if not nine to 12 months before beginning these measures.

CNN: If you're going to have to do it eventually, why wait?

Zakaria: It's really quite brave of the Conservatives to take on the fiscal problem but there is definitely a danger that they are doing it too soon and will put the economy into a lower growth mode. This is something that you have to remember for the United States as well. If you have lower growth, you also have a worse deficit because the biggest contributor to deficits is a decline in tax revenue. So the slower the economy grows, the fewer people who are employed, the lower the taxes going to the government treasury, the bigger and bigger the deficit becomes.

So, in a strange sense, even to help the deficit in the short term, you need a little bit of government spending to get the economy going, to get people spending, to get them paying taxes.

CNN: Does David Cameron's victory in the U.K. election tell us something about the future of conservatives in America?

Zakaria: Outside Britain, people are struck by David Cameron, the fact that he's become prime minister, that he's fairly popular and he seems to be taking big, bold measures. But here people are still struck by how limited was the Tory victory, if you could call it a victory.

After 13 years of Labour rule, when it would be only natural for the Conservatives to be given power for just cyclical reasons, after a very unpopular Labour prime minister and the worst economic crisis since the great depression, the conservatives still were not able to muster a majority and had to go into a coalition with the Liberal Democrats.

CNN: Why couldn't the Conservatives put together a majority in the election?

Zakaria: What thoughtful observers say was that the Conservatives still made no inroads in Scotland, did not make many inroads with working women -- which is a growing part of the population -- and they did not make many inroads with nonwhite minorities, people from India, and Pakistan and the Caribbean. As somebody put it to me, the Conservative brand is still a tarnished brand.

To me, that was a very interesting lesson for the right in America. You can have the small government argument David Cameron was making. It did have a lot of appeal -- but to England, not Scotland and not to the nonwhites in England either.

It made me wonder about the Republican Party in the United States, which of course has broader appeal, but still faces some of these same challenges.

The midterm election looks like it's going to go very well for the Republicans because there is a lot of anti-incumbency sentiment and some anger at the Democratic Party. But to seal the deal, Republicans need to close the gap with nonwhites and working women, and there, the Republican Party, like the Conservatives, still faces some challenges.

CNN: What other lessons are there for conservatives in the United States?

Zakaria: The Republicans should really watch the British Conservatives. What David Cameron is trying to do is to modernize the Conservative Party. The Conservative Party was seen in Britain as too right wing, too extreme and too intolerant in many ways and what he's been trying to do is to broaden its appeal.

David Cameron is more green, more environmentally active, than Gordon Brown. He's come out very strongly in favor of gay rights, he's come out in favor of the National Health Service.

All of this is a signal that he's not a Conservative who's going to completely destroy England's welfare state. In a sense, working with the Liberal Democrats has been a godsend for David Cameron. The fact that he's in coalition with them means that when the far right of his party asks him to do something, he can say, I'm sorry guys, I just can't do it because we're in coalition with the Liberal Democrats, and to keep the coalition together I have to moderate my stance.

Now there's an interesting debate in Britain about whether he's modernizing the Conservative Party because he is himself a great moderate or because he just wants to win and he knows the center is where the electability is.

In a sense it doesn't matter for Republicans watching it. You still need to be attractive to the center, to the younger generation, to working women and to ethnic minorities.

Of course it will all depend on how this economic experiment goes. If these cuts put Britain in a double-dip, you'll see great strains on the coalition itself, and the Liberal Democrats will find it difficult to stay in this coalition. Then this whole thing spins out of control.