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%|
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.”
Date Added: Friday 13th January 2012