Same old, same old

Quite a large number of countries are having austerity thrust upon them right now, either by the markets or by the EU.  But there are only two countries that have chosen austerity of their own accord:  the UK and Canada.  By coincidence, both countries tabled their annual budgets this week, and in each case, despite an alarming lack of evidence that the austerity is doing any good whatsoever, the finance ministers signalled more of the same for the coming year -- and beyond.

First to speak was George Osborne in London.  You can find the BBC's summary of his fiscal plans here.  Yet again, Osborne has been forced to downgrade his outlook for the economy: GDP growth is expected to reach only 0.6% this year, just half of what was forecast a few months ago.  The stagnant economy is making it very hard to cut the deficit; the Government is now signalling that it will take a fresh axe to spending after the next election (due by May 2015 at the latest), with social programmes at the top of the hit list.

There wasn't much new in the budget, but there were further signs of the Government's populist tilt, as it looks to head off the growing challenge from UKIP.  A planned fuel tax increase was cancelled yet again, and instead of a 3p hike in the duty on beer, it's to be cut by 1p.  Hardly a big deal when a pint costs more than three pounds, but it's interesting that Osborne has chosen to favour beer swiggers over wine and spirits sippers, who get no equivalent break.  There's also a "Help to buy" scheme to boost first-time homebuyers, with the Government in effect underwriting mortgage debt.  Details are "still to be worked out", which suggests this may have been a last minute addition to the speech.  And despite the poor fiscal outlook, Osborne is raising the basic personal exemption for income tax to 10,000 pounds in 2014, which will help keep his LibDem coalition partners happy.

A day after Osborne, Canadian Fin Min Jim Flaherty delivered his budget in Ottawa.  The CBC's nifty "interactive" summary can be found here. In common with Osborne, Flaherty has had to revise his growth outlook lower and his deficit numbers higher from the forecasts he presented at the end of 2012.  Flaherty and his boss, Prime Minister Stephen Harper, are in a vise of their own making, having pledged to eliminate the deficit by the time of the next election, which is due, as in the UK, by 2015.  Canada's fiscal situation is far better than the UK's, particularly in terms of the debt/GDP ratio, but this pledge leaves Flaherty no room for manoeuvre.  As a result the budget was truly a non-event, without even the populist sweeteners Osborne managed to find.  There's a pledge to crack down on tax avoidance, a few bits and pieces about training and infrastructure, and that's about it.

While Osborne and Flaherty, both right-wingers, vowed to persist with fiscal austerity, there are some interesting differences in how the two countries got into a fiscal pickle in the first place. The Daily Telegraph had an interesting graphic on its website, now unfortunately removed, that showed Labour and the Tories have both steadily racked up deficits whenever they have been in power in the UK over the past three decades, with only a couple of short periods of very small surplus.  You can argue -- Osborne certainly does --  that this approach was more misguided during Gordon Brown's years as Chancellor, because the economy was growing smartly and didn't need an extra boost from the Government.  But the fact is that neither of the main parties can escape responsibility.

In Canada it's a lot different.  Jim Flaherty (along with PM Harper) may,  out of necessity or choice, be a deficit hawk now, but it's worth remembering that he inherited a healthy surplus from the Liberals when the Tories were first elected in 2006.  That surplus was frittered away on Bush 43-style tax cuts,  a policy which backfired badly when the financial crisis hit.

That should be no surprise, though: the Tories have form when it comes to fiscal policy.  Back in the days of the Mulroney government, two decades and more ago, the Government introduced a long term deficit cutting plan every year, yet the deficit continued to grow.  It took the Jean Chretien Liberal government, with Paul Martin as Finance Minister, to get the deficit under control, with powerful assists from the fast-growing US economy of the 1990s and a weak exchange rate.  The clear lesson to be learned from that era is that GDP growth is the key to deficit reduction, but that's a message that's lost on Jim Flaherty, and on George Osborne.