David Cameron’s Victory and Bahraini Fiscal Reform

As he basked in the glory of an unexpectedly strong victory in the 2015 UK General Election, Prime Minister David Cameron could reflect upon an especially rare occurrence: the incumbent party strengthening its Parliamentary position after a first term.

As with most general elections—both in the UK and outside it—the key issue was economics, as the Conservative-Liberal Democrat coalition took hold of the reins at the peak of the biggest crisis faced by the UK economy since the 1970s and the infamous Winter of Discontent. A deeper look at the issues reveals that in spite of the extensive nominal differences between the economic systems of Bahrain and the UK, there are important lessons that the Gulf Kingdom can take from Britain’s roller-coaster ride through the last five years. At the heart of the matter is fiscal discipline, and the extent of the government’s role in the economy.

Cameron’s nearly unique feat was the result of his own sound economic policies on the one hand, and on the lamentably bad economic policies of Labor on the other. Ironically, most of the heavy lifting was done by Labor on behalf of the Conservatives, with Ed Miliband steadfastly clinging to the view that Labor’s traditional policies of big government and big spending were the ideal path forward. The Tories’ central message, therefore, barely extended beyond: “Labor’s terrible policies are what got us into the mess before 2010, and they are doubling down on them now; you don’t even need to hear our policies to know that they will be better!”

Let us return to 1997—the eve of three consecutive general election victories for the Labor party. The UK’s fiscal position was sound overall, with the budget surplus (not deficit!) standing at 0.4% of GDP, the public debt at 49% of GDP, and total government spending at 38% of GDP. The incumbent Tory government’s credibility in terms of economic policies had rightly taken a severe hit after the humiliating 1992 exit from the European Exchange Rate Mechanism, meaning that voters were unconvinced by the otherwise respectable economic growth rate of 3.9%. They were also seduced by Tony Blair’s “New Labor,” an apparent structural break with the spendthrift ways of traditional Labor, and Blair’s late predecessor, John Smith.

How did these broad diagnostics look after three terms of Blair and his Chancellor, Gordon Brown? By 2010, the budget deficit (no longer a surplus!) was 7.4% of GDP, the public debt was 75% of GDP, total government spending was 46% of GDP, and the economy was growing at a rate of 1.8%. New Labor was suddenly looking like what Winston Churchill once described as a “sheep in sheep’s clothing.”

This set of circumstances was hardly without precedent, since Labor governments (and socialist ones inside and outside the UK in general) have a proven track record in economic mismanagement. While one can debate the desirability of Margaret Thatcher’s social policies in the 1980s, there can be little doubt that her economic policies successfully reversed some of the damage caused by her Labor predecessors throughout the 1970s.

Ironically, the poorest economic choices that right-wing governments often end up making are actually the non-economic ones, namely their alarming propensity to start financially costly wars, with Republican George Bush being the most recent example. And socialists’ rejection of such wars is rightly grounded in the human cost that they entail. In terms of economics, the ideal government, it would appear, is the one that combines fiscal discipline, a commitment to small government and free market policies, and an absence of warmongering. That is why so many countries look to Singapore, Hong Kong, and even Dubai as beacons of sound government.

Apart from Labor, that is, as Miliband stoically adhered to Labor’s traditional maxims, thereby transforming Cameron’s job into merely feeding his adversary enough rope to finish the job.

What lessons—if any—can Bahraini citizens take from the 2015 UK General Election when it comes to confronting their own economic problems? There can be no disguising the difficulty of Bahrain’s current fiscal situation: the public debt has risen from less than 10% of GDP as recently as 2008, to almost 50% of GDP at the moment. And with the budget deficit projected to comfortably exceed 5% of GDP in the coming two years, the public debt is both moving and accelerating in the wrong direction. The International Monetary Fund and—more importantly—credit rating agencies, such as Moody’s and Fitch, have unequivocally advised the Bahraini government to address the situation urgently.

These institutions had a similar stance toward the UK economy in the wake of the financial crisis of 2008. Like Cameron’s coalition government, Bahrain has a tough choice to make: start the process of fiscal tightening in earnest, or continue spending without regard for the future. To be frank, however, this is not a tough choice—it is Hobson’s choice. The unsustainability of the current trajectory renders maintaining current spending levels irresponsible. It would also represent a break with the precise policy that ushered in Bahrain’s most recent period of economic prosperity (1999-2010): liberalization of the economy, which helped attract billions of dollars of foreign investment, creating thousands of jobs for Bahrainis at all income levels.

To those who care about the living standards of Bahrainis today, I ask them: do you not care about the living standards of Bahrainis tomorrow, too? This is the lesson that was grasped by the UK electorate in the last five years, and now is the time for Bahrainis to do the same. In line with the principles of Bahrain’s Vision 2030, subsidies must be reformed, and the public sector needs to play a smaller role, both in employment and in the economy overall. Delaying such measures only makes the necessary transition more painful.

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