I attended a fascinating talk yesterday by the Canadian ex-Cabinet Office Minister, Michael Mendelson, organised by the Barrow Cadbury Trust. He was talking about their experience of spending cuts during the early/mid-1990s and overseeing the “biggest fiscal consolidation ever in Canadian history” (sound familiar?).
In 1994 Canadian national debt stood at around 70% of GDP (by comparison at the end of December 2010 general government debt was 76% of GDP, according to the ONS). By 2008 it had fallen to 22% – the lowest of all the G7 economies. On the face of it, it would appear that there are similarities with the situation we are currently facing in the UK, but as Mendelson went on, the differences became more apparent than the similarities.
The Canadian view was that the time to cut public spending was when the economy was growing and by the mid-90s their economy was booming. Strong exports (principally to the US, whose economy was also growing) drove private sector growth at the same time as job losses in the public sector. At no time was unemployment rising in Canada throughout this period.
At this point the differences with the UK begin to become very clear. We are facing rising unemployment and a stagnant economy. With interest rates at close to zero, monetary policy gives very little promise and our main export markets are not looking too confidence-inspiring either. Mendelson pointed out the Spain, Ireland and the US account for 25% of UK exports…and the prospect of consumer growth in all three of those countries looks highly unlikely!
Another difference that was suggested by Mendelson was that there was not the same philosophical motivation driving their fiscal consolidation. He suggested that Ministers did not want to ‘roll back the state’ and shift provision to the private (or not for profit sector) but were committed to protecting and restoring the state’s public service role. It’s hard for me to question this view, however it’s worth pointing out that it was fiercely challenged by Canadians I was in touch with at the event and on twitter!
Mendelson gave an interesting description of the macro-economic picture and the Canadian experience compared with the UK. What I would have liked to have heard more about, was how this played out at a micro level.
What was the impact of the cuts on real people?
How did vulnerable groups fare?
What effect did the cuts have on income and wealth distribution?
These are the things that I feel we need to know, in order to draw out the real lessons from the Canadian experience, as the differences at a macro level are all too evident.
Some people have suggested to me that the impact of the cuts on Canadian society was hugely damaging and this was during a period of strong economic growth. How much worse will the effects be if the cuts are taking place during a period of stagflation? [Are we allowed to resurrect that 1970s term yet? It kinda feels like we should be!]
The government and the Chancellor in particular, have staked their reputation on the belief that sharply cutting public spending is the only way to fuel private sector growth and balance the deficit. We’re now a year in to the Coalition’s programme of spending cuts and we’re yet to see real evidence of significant economic growth. Unless the picture changes significantly over the next few months, one suspects it will become increasingly hard for the government to justify their approach.