Back on May 6 I wrote about a piece about the Institute for Government. This august body was extolling Canada's fiscal success in the 1990s as an example of what should be done in the UK. I felt that the Institute was giving Canada far too much credit for curbing public spending, when in fact most of the improvement came from higher revenues and falling debt service costs.
To my surprise, this "let's copy Canada" thing has continued to bubble along. In The Times today I read that the Conservatives are working hard to understand how Canada cut spending by 20% without destroying the economy. I can save the Conservatives the trouble and expense: Canada did no such thing.
As I wrote back in May, the impressive turnaround in Canada's fiscal performance had almost nothing to do with programme spending restraint and everything to do with revenues and debt service. This time I have the facts to prove it, courtesy of the Finance Canada website. I've focused on the period 1991-2001, which encompasses the end of Canada's era of fiscal extravagance, the correction period in mid-decade and the effective declaration of victory in 2001, when the Government announced a 5-year tax cutting programme. These are the highlights:
Total federal (central) government spending: rose from C$ 154 bn in 1991 to a peak of C$ 170bn in 1996; fell by 7.3% in the next two years to reach C$ 174 bn in 1198, then began to rise again. By 2001 it was 14% higher than in 1991.
Programme spending: rose from C$ 109 bn in 1991 to $123 bn in 1995; fell by 9.7% in the next two years to reach C$ 111 bn in 1997, then began to rise again. By 2001 it was 20% higher than in 1991. (Note, that's higher, not lower!)
Transfers to other governments: rose from C$ 23 bn in 1991 to a peak of C$ 27 bn in 1994, then fell by a total of 23.9% in the next four years, reaching a low of C$ 21 bn in 1998. They then rose to C$ 25 bn in 2001, or 8% above its 1991 level.
Debt service: rose from C$ 45 bn in 1991 to a peak of C$ 49 bn in 1996, then began to fall. By 2001 it was 3% lower than in 1991.
These numbers are a bit confusing, so let's pause for a second. There was certainly a slowdown in total spending in the mid-1990s, but it lasted only two years. What's more, the Government can't take a whole lot of credit for it. The dollar value of the fall in total spending from 1996 to 1998 was C$ 12.4 bn; of this, C$ 6.3 bn, or more than half, was accounted for by debt servicing costs, for which much thanks Alan Greenspan. Almost all of the rest (C$ 5.6 bn) was accounted for by reduced transfers to other governments -- provinces and municipalities. In effect the federal Government sought to alleviate its own problems by starving the provinces of cash. It's hard to see much of an example for the UK here. In any case, by the end of the decade all the major spending categories, even transfers to Provinces, were above their 1991 levels. Only debt service costs had actually declined in dollar terms (and continued to do so at the start of the current decade).
What about revenues? Well, these were largely stagnant at the start of the 1990s, because the North American economies were in recession. After that they took off, thanks to economic growth and tax measures. From 1991 to 2001, tax revenues rose by a total of 62%. If you want to know how Canada eliminated its chronic fiscal deficits and moved into reasonably sustainable surplus by the start of the current decade (though it's back in deficit now), you need to look no further than this.
I'm at a loss to know how the story about spending cuts has got such traction, but I note that a Canadian delegation, led by a former Cabinet Minister, Marcel Masse, has been peddling the story in recent weeks. Judging by today's Times story, Masse is claiming the credit for it. Ask any Canadian, though, and they'll tell you that the credit goes to Finance Minister Paul Martin, with assists from the Fed and the Bank of Canada. If the Tories are really listening to this stuff, they're getting the wrong story from the wrong guy.
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