The Tories have been looking at how Canada slashed government spending and balanced the budget in the mid-1990s. Will it work here? Simon Wilson reports.
Why are the Tories so interested in 1990s Canada?
After years in opposition, Canada’s Liberal Party swept to power in 1993 in a stunning electoral landslide that all but wiped out the ruling Progressive Conservative party. Over the following years, the Liberals pulled off an astonishing turnaround in the nation’s fiscal health.
When they took power, the national debt was heading for a peak of 72% of GDP. Meanwhile, the international credit-rating agencies had just downgraded Canada’s sovereign debt from triple-A for the first and only time. The Wall Street Journal even labelled Canada an “honorary member of the Third World”.
Yet a new government, led by prime minister Jean Chrétien and finance minister Paul Martin, successfully eliminated a C$42bn (£22bn) budget deficit in the four-year period to 1998. They also went on to win three more elections. No wonder the Tories are interested.
Is Britain’s fiscal position as bad as that?
Worse. In the next few years, the UK government’s debt is likely to exceed 100% of GDP. That’s due to public spending increases, bank bail-outs, economic stimulus spending and the collapse in tax revenues associated with a shrinking economy. Britain also has a higher deficit. Canada’s government deficit – ie, revenues minus spending – peaked at 9.2% of GDP in 1994. Here, our deficit is already around that level, and is set to grow to 12% in 2010.
What did Chretien and Martin do?
Canada had already tried ‘efficiency savings’, public-sector wage freezes and departmental budget cuts – with little success. Instead, what the new government attempted was nothing less than a self-professed ‘fundamental review’ of the role of the state. They slashed public expenditure by a fifth: some 23% of public servants (45,000 jobs) were made redundant; business and agricultural subsidies were cut by 40%-60%; defence spending dropped 15%; the transport and science budgets were halved, and some ministries were abolished altogether.
How did they pull it off?
According to Brian Tobin – one of the six ministers put in charge of the spending overhaul – the programme’s success was down to broadly based political support.
Indeed, some erstwhile opponents of spending cuts even protested that the Liberals weren’t being harsh enough. “The whole deficit reduction mantra crossed party lines,” he told the BBC in an interview this summer.
“Governments of all stripes were running, at a provincial level, balanced budgets and were making a virtue of balanced budgets.” And no quarter was given to departments who resisted: “We began to arbitrarily take money out. As that began to happen, people suddenly realised this was serious. They then began to work very hard to identify the savings themselves.”
Was it all down to spending cuts?
No. The tax take also grew as the economy recovered, just as the Tories no doubt hope it will here. Between 1994 and 1998, Canada slashed spending by C$14bn, but tax revenues surged by C$32bn. Falling unemployment (from 12% in 1993 to 9% in 1998) was also crucial in reducing the deficit, since it cut welfare payments and upped the tax take.
As such, some economists argue that the spending cuts were not the primary factor in cutting the deficit to zero. In an article earlier this month in The Star (Toronto), economist Arthur Donner and Doug Peters, who was a junior finance minister at the time, argued that “the spending cuts introduced in 1995 may actually have retarded budget deficit reduction as they substantially reduced employment (and thus tax revenues)”.
How does this relate to Britain?
The arguments about Canada’s drastic spending cuts in the 1990s mirror current policy debates in Britain. George Osborne periodically raises the spectre of the ratings agencies downgrading UK sovereign debt. His language mirrors Canada’s politicians, who were spooked into radical action by the fear of a downward spiral of fiscal deficits, downgraded government debt, higher borrowing costs and bigger deficits.
Jocelyn Bourgon, the top civil servant at the time, and Marcel Massé, a government minister – two key architects of Canada’s cost-cutting 1995 budget – came to speak to Whitehall’s Institute of Government in June. Ms Bourgon said the key to success was forcing each department to review all functions and come up with cuts. Above all, leave “nothing off the table”.
What would Osborne do?
Shadow Chancellor George Osborne praised the Canadian model in a speech in August: “The result was… significant spending reductions and transformations in the way that services were delivered.”
So far Osborne has announced a bold approach to cuts, compared with Labour plans. This includes a one-year freeze on public sector pay from 2011 for all those earning more than £18,000; a £50,000 cap on civil service pensions; slashing Whitehall costs by a third (saving more than £3bn) and the abolition of £250 baby bonds and tax credits for families earning over £50,000.
Total savings: £7bn a year by the end of the first term. That’s nowhere near the scale of Canada’s achievements. But then Chrétien and Martin didn’t announce their full agenda until after they had won the election.