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How to Cut Government Spending: Lessons from Canada

If the Coalition were to be far bolder in cutting public spending, it could expect higher growth, lower national debt – and a political windfall, write Brian Lee Crowley and Tim Knox in How to cut government spending: lessons from Canada, published on Friday 13 January by the Centre for Policy Studies.

For these are the key lessons from the successful programme of spending cuts introduced in Canada in the mid 1990s. Programme spending (all government spending except debt interest payments) fell by a total of 9.7% in nominal terms between 1994-95 and 1996-97. In response, the Canadian economy took off: between 1997 and 2007, the economy grew by an average of 3.3% a year – the fastest rate of all G-7 economies; business investment grew by 5.4% a year; and employment grew by 2.1% a year. As a result, the national debt fell by over a half, from 68% in 1995-96 to 29% of GDP in 2008-09.

This successful approach was far more radical than the Coalition’s current plans (announced in the Autumn Statement), as the following table demonstrates:

 

Start of cuts

End of cuts

Gov spending at start

Gov spending at end

Average nominal change

 

Canada

1994/95

1996/97

$123.2 bn

$111.3 bn

– 4.95%

 

 

UK

2010/11

2016/17

£688.5bn

£758.7bn

+ 1.6%

 

    
        

 

According to the 2011 Autumn Statement, the UK deficit will still be £24 billion in 2016/17. And the national debt will have increased from 60.5% of GDP in 2010/11 to 75.8% of GDP.

There are of course many differences between the two countries. Most importantly, unlike today, Canada’s economic crisis happened when the global economy was reasonably healthy. However, the authors suggest that the following lessons should be learnt from Canada’s experience:

  • Have conviction. It all starts with political determination
  • No sacred cows: don’t ring-fence departmental budgets
  • Cut specific programmes: a 5% across-the-board cut will not have a lasting impact
  • Cut spending before increasing taxes
  • Above all, be bold. In political terms, this can be very rewarding. In Canada, the party that cut spending won three majority elections in a row.

Tim Knox, Director of the Centre for Policy Studies, comments:

“The Labour Party has now accepted that it cannot commit to reversing any Coalition cuts to spending. With the UK needing to raise another £188 billion from the bond markets this year, it is essential that the Coalition shows determination in getting the national finances under control. That is why it must be inspired by, and take conviction from, the lesson of Canada in the 1990s.”

MEDIA IMPACT:

"So far, the Coalition has talked tough on public spending. Earlier this week, the Labour Party has accepted that it will not commit to reversing the Coalition's spending cuts. This cross-party consensus is encouraging, but it is now time to match the rhetoric with some real reductions in government spending and in the role of government itself. We should heed the words of Paul Martin, Canada's finance minister from 1993 to 2002, at the beginning of the great Canadian experiment: "We are acting on a new vision of the role of government in the economy. In many cases that means smaller government. In all cases it means smarter government." - TIM KNOX IN WALL STREET JOURNAL Canada's austerity lessons for the UK


‘Mention of Canada is timely because the Centre for Policy Studies, the free market think-tank set up by Margaret Thatcher and Sir Keith Joseph, has just published a pamphlet showing how Canada dug itself out of a huge financial hole in the 1990s when it was widely seen as a financial basket case.CPS Director Tim Knox says in his pamphlet that the centre-Left Canadian government went far further than our Coalition in cutting spending.’ - DAILY MAIL Labour’s two Eds are still in denial about the past and the future

‘That’s why I believe that, while the UK Government is acting more responsibly than many others, something far more drastic is needed. With the state now accounting for around half of total GDP, the answer – at least the long-term answer – can’t be more taxation. The state must do less, much less, and do it better. There really is no alternative.
 
Some point to Canada’s fiscal consolidation as an example Britain may follow. A new pamphlet from the Centre for Policy Studies makes a compelling case.’ –LIAM HALLIGAN COMMENT IN DAILY TELEGRAPHThe French downgrade should be a warning about hidden UK liabilities

‘Paul Martin, the centre-left finance minister who scaled back public spending in his country to the level it was at in 1951, said in an exclusive interview with Huff Post UK that ring fencing was not the right way to reduce deficits: “If everybody is going to have to give than everybody better give. You can’t have exceptions.”Commenting on a report by Margaret Thatcher’s favourite think-tank the Centre for Policy Studies, which recommended the coalition’s cuts should go further and take inspiration from the Canadian model, Martin said instigating unprecedented spending cuts protected his country from financial crisis.’ – HUFFINGTON POSTGovernment Wrong to Ringfence Departments

 

Brian Cowley and Tim Knox - Friday 13th January 2012

Tim Knox was Director of the CPS from 2011-2017. Before he was Director, Tim was the Editor at the CPS - a position in which he was responsible for publishing papers by every Conservative leader since Mrs Thatcher as well as by hundreds of leading academics and opinion formers.