Wednesday 20 October 2010

It won't be like that

As media types solemnly scrutinise every detail of today's UK spending review, the main thing to remember is this: one way or another, the future will not unfold the way George Osborne is predicting. If opponents of the cuts are correct, the impact on the economy will be so severe that the government will have no choice but to slow the austerity programme, or else risk tipping the economy back into a recession that will make its fiscal targets unachievable anyway. If, on the other hand, the economy responds well to the dose of austerity, spending will start to creep up again as the government ponders the approach of the general election due in 2014.

A few months ago there were suggestions everywhere that the coalition would take its cue from the fiscal austerity programme supposedly implemented with great success in Canada in the 1990s. We even saw superannuated Canadian politicians pitching up in London to brag about what a good job they had done. As I have written here many times, there are almost no lessons for the UK to take from Canada's experience. Although the Canadian federal government indeed announced a series of spending cuts around the mid-1990s, well before the end of that decade all categories of public spending were rising again. How come? Well, rapid economic growth, largely triggered by a recovery in the US economy, boosted revenues so strongly that the spending cuts became unnecessary. Whether the Canadian government would have been able to push the cuts through if they had truly been needed is unknowable.

The UK is most unlikely to benefit from a surge in growth among its major trading partners, so the Canadian experience will not be repeated here. Where Osborne could have learnt from Canada is in setting achievable short-term goals (no more than two years at a time) and building credibility by ensuring that those goals are always met. Osborne has ignored that completely, spreading the pain over a four year period and back-loading changes that could surely have been implemented more quickly if the fiscal need was really as severe as the Government keeps claiming. The earlier announcement of changes in child tax credits to become effective only in 2013is a typical example of this, and there are many others buried in today's spending review.

For now, the incompetent but all-important ratings agencies and the dreaded bond vigilantes may profess themselves satisfied with the existence of a four-year programme. However, when unforeseeable events push the new fiscal plans of course, as they inevitably will one way or the other, it will be interesting to see how the government seeks to maintain its credibility.

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