Why the Canadian experience may not be answer for the UK economy
Ahh yes, the famous ‘Canadian model’ of friendly spending cuts. There’s been much hype in the political press about this supposed silver bullet.
The programme review of the mid-1990s saw the friendly congenial north Americans convert a budget deficit of over nine per cent of GDP into surplus by 1997. And it was all done around a camp fire with marinated moose burgers, backslapping, a couple of cans of Coors, and little pain. Right?
Fantastic, say the coalition Treasury.
Well I put this to a Canadian who should know – Jim Flaherty, Canada’s finance minister. In a previously unbroadcast remark, made last year, George Osborne’s own counterpart from the nation he hopes to emulate was rather clear when I asked what lessons the UK could draw.
He practically started laughing. “I’m not sure which model they’re talking about. Maybe they’re talking about the model from the mid-1990s?”
“Yes, that’s it”, I said.
“I’d advise caution,” replied the Canadian finance minister.
“In the mid-90s what the government of the day did was to reduce transfer payments for health, education, and social services.
“This caused great hardship to [Canada’s] provinces and resulted in reduced services in health, education and social services.”
So this is the view of Canada’s current conservative finance minister. During these cuts he was an opposition politician in office in Ontario, which bore the brunt of the cuts.
There are two other important cautionary points re: Canada.
First, deficit reduction in the mid to late 1990s occurred against a backdrop of a dotcom booming US economy next door, and average growth in Canada of a whopping 3.4 per cent per year.
The Bank of Canada cut interest rates from eight per cent to three per cent, something impossible here when they’re already 0.5 per cent. Put simply, this is not going to happen in the UK over the next five years.
Where Canada might be a particularly helpful analogy is in the savaging afforded to Canada’s then generous welfare system. Canada’s Scandinavian-style benefit system was systematically dismantled. Unemployment benefits in particular were reduced.
And if you listen to the speeches of the prime minister and the chancellor, there have been a huge number of mentions of the ballooning benefit bill.
Cutting benefits, tax credits (though not ring fenced pensions) is the real lesson that the coalition is trying to teach from Ottawa.
Other than that, in macro terms there is absolutely no chance of the Canadian experience being repeated in the UK.