For once, Canada is making the news for the wrong reasons: The government of the United Kingdom has braced the country for cuts in government spending of up to 20 per cent as the new Conservative-Liberal Democrat coalition lays the groundwork for an austerity program to last the whole parliament. Their inspiration? According to the Telegraph, the administration of Prime Minister David Cameron hopes to draw lessons from the experiences of the Canadian Government of the 1990s. Before too much damage is done, we suggest they’d better re-read the history books a bit more closely.
The standard narrative of the Canadian experience in the 1990s is this: in 1993, Canada’s budget deficit and debt-to-GDP ratios were the second highest amongst the G7 countries, after Italy’s, and the U.S. financial press was unfavourably comparing Canada to Mexico. That year, with the IMF supposedly lurking at the door, the Liberal Government of Prime Minister Jean Chretien, and his Finance Minister, Paul Martin, laid out a goal to halve the budget deficit to 3 per cent by 1998, with an unannounced goal of a zero deficit by 2000. Martin began cutting costs significantly in 1994, chopping 10 per cent from department budgets and converting a deficit equal to nearly 7 per cent of gross domestic product into a surplus by 1997. By 1998, the deficit was eliminated and overall debt was dropping quickly, amidst a rapidly growing economy.
Success, correct? Certainly, this narrative has largely gone unchallenged (even in Canada). It has metamorphosed into received wisdom, and has been used to has been used by many to justify a renewed assault on the welfare state; it is argued that the impact of Chretien government’s cuts in public spending allowed Canada to get through the Asian crisis with little damage and go on to become one of the strongest Western economies.
And this is the lesson drawn by the British government. Hence, the remarks of the Chancellor of the Exchequer, George Osborne, who yesterday announced an unprecedented four-year spending review. According to Osborne, every Cabinet minister will have to justify in front of a panel of colleagues every pound they spend. He said the task ahead represented “the great national challenge of our generation” and that after years of waste, debt and irresponsibility it was time to bring public spending under control guided by the principle that people should ask “what needs to be done by government and what we can afford to do”.
The Canadian experience certainly makes for an interesting story, although we suspect that the IMF threat was significantly overstated. In 1995, Canada had a debt to GDP ratio which was around half of that of Italy and Belgium. Yet curiously, those countries were never deemed to be ready-made victims for the Fund’s Little Shop of Horrors, even as the Canada was supposedly threatened with the prospect of becoming a ward of the IMF a la the United Kingdom in 1976. In truth, the IMF threat represented yet another in a series of manufactured crises so as to enable longstanding opponents of government spending to muscle through budget cuts in vital and politically popular social programs.
The reality is somewhat more complex, as Professor Mario Seccareccia of the University of Ottawa has noted in a paper entitled, Whose Canada? Continental Integration, Fortress North America, and the Corporate Agenda, Montreal & Kingston: McGill-Queen’s University Press, 2007, pp. 234-58.
In the paper, Seccareccia noted the real reasons for the “success” of the Chretien/Martin austerity programs:
1. High growth in the US, Canada’s largest trading partner, combined with a sharply declining Canadian dollar (which fell as low as .62 cents against the greenback) and the implementation of the North American Free Trade Agreement (NAFTA), all of which combined to push the export sector’s share of Canadian GDP to 45% by 2000 (now about 33%), and
2. An expansionary monetary policy which did stimulate significantly consumer spending, and which was sustained until the financial crisis.
The turnaround emerged despite the fact that investment remained weak relative to historic economic recoveries. But the massive turn in the country’s external sector was largely made possible through a revival of growth in the US (Canada’s largest trading partner). The stock market boom in the US, the high tech bubble, and the beginnings of the American real estate boom (all of which were fuelled by huge increases in US PRIVATE debt growth, another malign effect of the Clinton budget surpluses), created huge demand for Canadian exports, which largely drove Canada’s recovery. If anything this vast improvement in Canada’s external account largely offset the deflationary impact of the fiscal austerity which, in any case, likely IMPEDED, rather than facilitated, economic recovery, given the slashing of employment insurance and social welfare benefits.
The other byproduct of this Canadian “budget miracle” was the increasing indebtedness of the Canadian private sector, a phenomenon mirrored in the US by the Clinton Administration, which repeatedly recorded budget surpluses in the late 1990s. Again, this is no surprise to those of us who adopt this financial balances approach, but it does give a fuller (and less flattering) picture of the ultimate impacts of eliminating Canadian “fiscal profligacy”.