Emergency Budget: harsh lessons from Canada

The coalition government has spoken of emulating Canada’s success in enacting austerity measures. They should go Canadian, but it is important that they grasp all aspects of the Canadian success.

Paul Martin and Jean Chrétien have rightly been commended for their austerity measures, starting with the 1995 Federal Budget; however, austerity went from the bottom up. Beginning with the NDP government in the province of Saskatchewan in 1992 and moving on to the Progressive Conservatives in Alberta in 1993, provincial austerity swept east. Even though Ottawa cut transfers to provincial governments by a third, provincial governments by and large kept their budgets balanced or in surplus. Indeed six of ten provinces enacted laws banning or penalising deficits in some way. Accordingly, if the UK wants to emulate Canada, local councils must make a significant proportion of the spending cuts.

Another important lesson from Canada is the importance of economic growth to deficit reduction. Between 1992 and 2000 Canadian GDP rose 40% – making it far easier to balance the books. In contrast, as Tim Congdon has pointed out, there are several reasons to be pessimistic about the medium-term growth prospects of the UK. This suggests George Osborne will have to be even more radical than the Canadians in cutting spending.

A related point is that the Canadian government never ruined the country’s comparative advantage during its fiscal crisis; it did not engage in any significant tax hikes or punitive taxes on certain groups. This is instructive given that the coalition government has proposed large increases in Capital Gains Tax.  Hampering the British economy with higher taxes or onerous regulations would clearly undermine the effectiveness of the austerity measures.

If UK growth were to average 2.5 per cent a year over the next eight years, that would only amount to about 20 per cent (all right, I know it’s compound), not the 40 per cent you mention for Canada.Some local authorities do seem to have been successful in not increasing Council Tax in recent years, so keeping spending down there probably can be done.Given that our problem is not taxes being too low, clearly nearly all of the deficit reduction has to come from cutting government spending. That would seem to require the political will to do it, not just by the governing coalition parties, but by the Opposition and indeed the public at large.The big danger is backsliding in a year or two.

Sticking with it is indeed the hard part. In spite of Canada’s population being about 30% larger today than at the time, the nominal spending on things like education and health are roughly the same. Quite simply the federal government and most provincial governments – Ontario the notable exception – have managed to keep the cuts. In Canada nothing was kept off the table, there were no ’sacred cows’, and that was a large part of the country’s success. 46% of the UK’s budget is in health or welfare. Cut those, heck, eliminate those and you’ve taken away the budget deficit and then some.

Good piece Dan.
Any nominal growth we have thus far seen has been on the back of government stimulus. This of course is only temporary. Once the spending -backed by government borrowing- stops, the only likely outcome is a double dip.Decreased regulation and lower taxes are essential for ensuring growth in the medium to long term. The government is making the right moves in retrenching government, yet what is is really needed is a total rethink of our monetary system. Our system still operates on the fallacy that consumption based on debt can create sustainable growth.Government should allow for the necessary transition to be made instead of perpetuating this system.

@Andre Good point. Not only have the academics and their papers supported your position but simple fact. Canada has decreased regulation and proposed a timetable to reduce the corporate tax rate even further down the 15%. The result of phased – predictable – reductions in regulation, spending and taxation has led Canada to having the fastest growth rate in the G8 most of the past 10 years and likely for the next 10.

Where aboot are you from, Mr Osborne? A native Canuck, eh? Cup of liber...tea on the top of the hour? SHHHHHHHH......shizhurrrrrr!

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