Overseas places come and go as the fashionable one to talk about in Westminster political circles. After 1992 it was Japan, with the fourth Conservative general election victory in a row spawning comparisons with Japan and the long period of Liberal Democrat rule there. In the run up to 2005 it was the Australian state of Queensland, where an incumbent state government had seemed set for re-election but suffered a shock defeat, put down largely to complacency amongst its supporters. And of course, as a third example, when in doubt there’s always the 1960 US Presidential election, Barack Obama or some lines from the West Wing to quote.
The country of the moment is Canada where, in the mid-1990s, a sizeable budget deficit was eliminated by a newly elected government. Less often mentioned, though undoubtedly in the minds of some, is the political epilogue as that government was then subsequently elected to a second term and indeed after that a third term. For the more high minded, there is the economic epilogue which is that generally the deficit elimination is seen as a successful piece of economic policy, even if during subsequent happier economic times a significant amount of extra spending went to restoring some of the areas cut in the mid-1990s.
The excellent Institute for Government has produced a guide to how the Canadian deficit was eliminated:
From the Canadian experience with Program Review, the following lessons can be drawn:
1. Eliminating a sizable deficit is a societal project not a normal budget exercise.
A budget exercise often involves a small number of people working in relative secrecy. The purpose of the exercise is to reconcile fiscal capacity with demands for funding, including funding for new government priorities. Eliminating a sizable deficit involves a realignment of the role of government in society. As such, it requires a more open and inclusive approach, one that engages the whole of government.2. Scale is important.
Scale makes possible reforms that alone would not be politically feasible. All programmes have beneficiaries. Cuts that affect individual programmes unleash a strong reaction on the part of those beneficiaries. The scale of Program Review helped to balance single interests with the collective interest. The public judgement about the merit of the approach hinged on the relative fairness of the proposals among regions, groups, income levels, and so forth.3. Speed is important.
Successful public sector reforms are incrementally implemented over time. However, where a high level of societal consensus has been achieved, it is preferable to move expeditiously. It creates hope at the end of the tunnel.4. Prudence is important.
Prudence is about protecting the collective journey while avoiding slippage due to unforeseen circumstances. A high degree of prudence was built around Program Review. It was achieved through lower-than-average fiscal hypotheses, the creation of a contingency reserve and the elimination of policy reserves for funding new initiatives.5. Luck plays a role, but it does not last forever.
During the period of Program Review, there were no major external shocks to throw the exercise off course. Furthermore, the North American Free Trade Agreement created strong external demand for Canadian exports.This, combined with a weak Canadian dollar, replaced domestic demand and facilitated adjustment. But, chance does not last forever. The next economic downturn will come and will reveal if the measures taken were sustainable. Canada did well during the following economic downturn (2001) and 11 surplus budgets demonstrate the reforms were sustainable.
6. It can be done.
The test of a successful reform is whether the desired outcome is accomplished at the lowest possible costs to society while minimising the unintended consequences. In that perspective, easy cuts and easy targets may be the worst approach since they might not be sustainable; could erode some of the levers needed to meet priority societal needs in the future and cause damage to the public sector institutional capacity to serve. It is possible to lead ambitious reforms and to make choices in a principled and defensible way for citizens and public servants.
The announcements from the Treasury in recent days suggest a similar approach will be taken in the UK. There are though some important differences, most notably that the debt and deficit situation in the UK is tougher than the Canadian one was and it is having to be addressed at time when the world economy is in a much bleaker situation. (This is one of the points Neil Stockley has made in his post on the matter, which is full of useful links to other accounts of the Canadian experience.)
In addition, Canadian’s federal structure means that there was much more of an option to push decisions or services on to state governments than there is in the UK, although we’ve already had a hint of this here with plans such as those to freeze council tax in England whilst reducing the amount of ring-fencing of funding. In other words, central government is saying to local government, “You’ve got to cut, and here’s some extra freedom to decide where to cut”. Even so, local government plays a much smaller role than state government does in Canada.
The other difference is that the larger UK economy and government means it is much harder for individuals to know enough detail to be able to make meaningful decisions. The UK may be bigger, but there’s still just the one Prime Minster, one Chancellor and so on and they don’t get any more hours in the day than their Canadian counterparts. Instead there is greater reliance on other people telling you what you need to know,, which is of course the staple of many a Yes Minister type problem.
The lack of knowledge amongst ministers and MPs about what is really got up to in all sorts of corners of the public sector is a point I made previously in the context of the Office of the Public Guardian, highlighting its inefficiencies but also the lack of any meaningful scrutiny of what it gets up to. As I said then:
It’s all a salutary reminder that when parties make broader statements about the spread of government bodies how little is usually known about the actual bodies being discussed. Broad principles are necessary but so too is detailed knowledge if those principles are to be turned into effective policy making rather than ignorant shoehorning of everything into preconceived solutions.
That would be a problem for any government, but it matters all the more when the government has to be saving money rather than deciding which way to spend more money. The opening up of government financial data and contracts to greater public scrutiny will help some areas of questionable spending to be identified, though I fear it won’t help where what is really needed is expert, detailed knowledge of how a project or body works.
To take a different example, more transparency over how the Electoral Commission spends money may identify some areas for saving, but it won’t help (and can even distract) from the core problem of needing to know enough about the details of how it works and the impact of its actions in order to be able to judge what is crucial for clean politics and what is unnecessary bureaucratic growth.
Copying Canada’s approach will not therefore be enough on its own, even if it is reassuring in many ways as an example of what can be done.
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15 Comments
Good post…!
The biggest difference though between Canada then and the UK now is perhaps skipped past here – that is, that Canada in the mid-1990s was able to take advantage of a global economy that was largely in good health, with many customers for its increased export base (which took advantage of the weakened currency in point 5) – whereas today the global situation is, err, less rosy.
But on the points regarding making the process open and democratic, and on devolving decision-making ability to local authorities, I’d very much agree!
Haven’t the Canadians had a massive rise in homelessness and poverty?
I’m sure I heard somewhere about the rise of grassroots organisations that were organising all sorts of demonstrations against the increase in the difference between the wealthy and those who sufered. Must go and take a dig around to see if I can find it on the net when I’ve time.
Canada had the US able to mop up its exports; Europe is broke and won’t take ours. This will be much harder than the Canadian example.
It should perhaps be made clear that the Liberal Democratic Party of Japan is not in any way linked to our wonderful party: it just happens to have a similar name. [It is not, for example, a member of Liberal International.]
At the risk of being pedantic: Canada doesn’t have any state governments, to spend money or have decisions deflected onto; it has Provinces, and Provincial governments.
When you chuck a whole load of people out of State jobs, you need to have some sort of game plan as to where you hope they are all going to go to. If they all get generous benefits, you don’t save money. If they don’t get jobs and they don’t get much in benefits, then they cut their spending. Then, private companies lose turnover, then they put more people out of work, then tax receipts fall, and hey presto, you have caused a recession while doing nothing effective to cut the deficit.
The Canadians largely avoided this nightmare because their sacked public sector workers picked up private sector jobs in a booming economy. It really doesn’t matter crucially whether their new earnings came from exports or from higher internal consumption, it just matters that they earned the money and paid their taxes on their earnings.
What sector are we going to see booming in the future? Because if there isn’t one, our cuts won’t work.
Standard Keynesian theory says that we should frantically dig holes and fill them in again, or else persuade people to ever greater feats of consuming the earth’s resources, so as to achieve the necessary private sector boom. It works fine, given an inexhaustible supply of planet of course.
A more rational programme would be to think about the things we actually do desperately need to get booming. Renewable energy to replace that oil which is fast running out. A massive building programme to create houses that don’t leak heat like sieves. Expensive, job-creating, economy-preserving.
Let’s face it, we’re going to have to support poorer schools and hospitals, more soldiers dying with inadequate equipment, etc, etc. All this stuff about ring-fencing and clever progressive scalpel cuts is largely flim-flam, the only tool that will really work in the end is a great big axe. If we’re going to support that, we need to find a good reason. Saving the planet – or even just positioning the UK to survive the coming ecological crisis – would be a good enough reason.
Frankly, I think this referencing of the Canadian cuts in the nineties as relevant to the UK now is almost completely fallacious. Canada had a big deficit, but everything else was different, a point that has been made recently by Paul Martin, the finance minister under the Chrétien government. If Canada is being referenced simply to gain comfort from the knowledge that the Canadian Liberals won two more elections, that is not so bad, but what worries me is the use of the Canadian example to justify cutting hard and quickly.
Anyone reading the press is aware that there is a raging argument going on between economists on how far government can cut, and how quickly without damaging economic recovery. It’s difficult for the rest of us to know which opinion is correct, but it would be tragic if the decision taken by the coalition was based on the almost irrelevant Canadian experience.
Only Thatcherites regard Canada as a success story – poverty rose, education was impaired as class sizes rose, hospitals closed and those that remained open were understaffed and infections rose.
Interesting – does anyone have a reliable source of stats that demonstrates the kind of thing that Alan Milnes says…? would be quite keen to take a look at figures that back up such statements… I don’t doubt that much of your comment is fair Alan, I’d just like to see the sources for what you’re basing it on as I’m still learning about the Canadian scenario…
While I was pleased the Liberals in Canada won 3 elections in a row, it is crucial to remember that the conservatives were split into 2 parties at the time, who stood against each other and allowed the Liberals to win lots of seats on low minority votes. Since the Tories reunited we have seen one minority Liberal government in Canada and two successive Tory ones.
Don’t have a lot of time right now but the BBC article linked to my name might be a good start.
Canada is a peculiarly bad example:
http://krugman.blogs.nytimes.com/2010/06/10/oy-canada/
Steve – as ever, Krugman is forthright, and of course just plain right – we ought to heed his words about choosing historical precedents carefully…!
What does “It was achieved through lower-than-average fiscal hypotheses”
mean?
Perhaps a better example than Canada would be Sweden’s success in closing its budget deficit in the 1990s. While they also benefited from exporting in a growing global economy, at least they had just had a serious banking crisis like ours. The key lesson there is for politicians to take responsibility even when in opposition, and the need to work across party lines to achieve consensus (e.g. on reforming state pensions and the tax system). Ed Balls’ refusal to propose any cuts on the grounds that he was not in government is not a good start on that front.