Emergency Budget: harsh lessons from Canada
The coalition government has spoken of emulating Canada’s success in enacting austerity measures. They should go Canadian, but it is important that they grasp all aspects of the Canadian success.
Paul Martin and Jean Chrétien have rightly been commended for their austerity measures, starting with the 1995 Federal Budget; however, austerity went from the bottom up. Beginning with the NDP government in the province of Saskatchewan in 1992 and moving on to the Progressive Conservatives in Alberta in 1993, provincial austerity swept east. Even though Ottawa cut transfers to provincial governments by a third, provincial governments by and large kept their budgets balanced or in surplus. Indeed six of ten provinces enacted laws banning or penalising deficits in some way. Accordingly, if the UK wants to emulate Canada, local councils must make a significant proportion of the spending cuts.
Another important lesson from Canada is the importance of economic growth to deficit reduction. Between 1992 and 2000 Canadian GDP rose 40% – making it far easier to balance the books. In contrast, as Tim Congdon has pointed out, there are several reasons to be pessimistic about the medium-term growth prospects of the UK. This suggests George Osborne will have to be even more radical than the Canadians in cutting spending.
A related point is that the Canadian government never ruined the country’s comparative advantage during its fiscal crisis; it did not engage in any significant tax hikes or punitive taxes on certain groups. This is instructive given that the coalition government has proposed large increases in Capital Gains Tax. Hampering the British economy with higher taxes or onerous regulations would clearly undermine the effectiveness of the austerity measures.