Nearly two weeks in, and still we’re none the wiser about exactly how our new government plans to bring down the budget deficit (the rate at which our national debt is rising).
But over at the Treasury they are apparently looking at the radical measures used by the Canadians in the mid-1990s. At the time, Canada was running a deficit of more than 5% (it peaked at 9.2%), due in part to attempts to spend away stagflation. Stimulus packages were tried over and over but, as Mirabaud Securities points out, they repeatedly failed, and merely increased “the stock of debt”.
Beginning to sound familiar? In Canada the situation was made worse by the fact that high interest rates caused the cost of financing the deficit to “balloon”. At their peak, interest swallowed up over 35% of Canadian government revenues. Nasty. Canada’s first attempt to sort this was much the same one now being suggested by politicians in the UK: smallish across-the-board cuts. It didn’t work. Instead it became clear that, as Mirabaud’s Steve Clayton puts it, “big monsters can not be slain with pin pricks”.
So Canada launched a process it called Program Review. This had each department look at all of their func-tions and “appraise whether what they did was actually in the best interest of Canadians”. It worked. Not all departments ended up with big cuts, but 11 saw their spending fall by 20% or more. The Federal payroll fell by 20%. The deficit was gone after three years. Canada then ran surpluses for a decade, bringing national debt down from 60% of GDP to 30%.
We have a tougher job ahead. Our budget deficit is bigger; they did the work at a time when global trade was on the up; and there was no global financial crisis in the mid-1990s. Yet I think we can be pretty sure that we will see the start of our own ‘program review’ before the year is out. There is no way to hang on to long-term financial health without slashing public spending. The experience of others shows this is the only real way to do that. Note also that the authorities are aware of the Canadian experience: only last May Gus O’Donnell chaired a lecture on the subject at the Institute for Government. There isn’t an “if”: it’s a “when”.
That means you might want to take another look at your portfolio. Is government advertising in the best in-terest of Britons? If the review decides not, says Clayton, maybe you don’t want to hold firms that make money from display advertising (Trinity Mirror, for example). What of firms currently making a mint out of PFI projects? Are these in our best interests? If not, do you want to be holding, say, Serco and Capita? And if the government cuts back on construction, do you want to be holding Carillion?
It all backs up our long-held view that if you must be in equity markets, you should be in companies with strong international earnings. Think Unilever, BAT and GlaxoSmithKline.