I was amazed to find former Canadian Finance Minister (and, ever so briefly, PM) Paul Martin being interviewed on BBC News's HardTalk last evening. The interviewer was probing him about Canada's success in curbing its fiscal deficit in the 1990s, which is still being cited as a precedent/example for the UK.
I've blogged about this before, because it's a total crock. Here's a lengthy extract from something I wrote on the subject on 7 July 2009:
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 don't mean to belittle Martin's achievement. Previous Finance Ministers of both major parties had made a big song-and-dance about cutting the deficit for years, without ever actually doing it. Martin saw both an opportunity and the need to fix the problem, and simply did it. (Canada has now slipped back into deficit again, under a right-wing government). But the supposed lessons for the UK escape me entirely. Consider:
* Martin benefited from falling interest rates for most of the 1990s, which cut debt servicing costs and boosted revenues. There's no scope for lower rates in the UK in the next few years.
* Canada's economy was boosted by strong growth in its dominant trading partner, the US, during the decade of fiscal adjustment. It's hard to see where the UK can look for that sort of helping hand.
* the only category of spending that Canada truly cut was transfers to Provinces, which is not an option in the UK. (That said, Gordon Brown's attempts to force local authorities to find the funding for his insane care-at-home scheme may be a clue to how Labour will find "cuts" if it gets re-elected).
In the end cutting Canada's deficit proved surprisingly easy -- after just a couple of years Martin was routinely lying about how strong Canada's fiscal position was, in order to fend off demands for higher spending or tax cuts. But that's not to say it was pleasant. Living standards were largely stagnant through the 1990s, which caused a great deal of grumbling and ultimately cost Martin's Liberals an election. In the almost certain absence of the factors that made it easy for Canada -- strong growth elsewhere and falling interest rates -- the UK is likely to find the whole process a lot less agreeable.
I don't think I'm going to write about the "Canadian example" any more. The mythology is too well established.
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