What you need to know ahead of the Spending Review: the Canadian experience

Patrick Nolan 3:11pm

This is the latest of our posts with Reform looking ahead to the Spending Review. The first six posts were on health, education, the coalition’s first hundred days, welfare, the Civil Service, and the New Zealand experience.

Canada

In a forward to Reform’s alternative 2010 Budget, Rt Hon Paul Martin, Canadian Finance Minister from 1993 to 2002 and Prime Minister from 2003 to 2006, noted that when a new Liberal government was elected in Canada at the end of November 1993 the deficit and debt-to-GDP ratios were, with the sole exception of Italy, by far the worst of the G7. In 1998, just 4 years later, Canada’s deficit was no more, the debt ratio was dropping like a stone and the financial record was second to none. Rt Hon Paul Martin explained how this was achieved:

-- First we commissioned a new range of revenue projections that would enable us to realistically estimate the size of the fiscal gap that we had to deal with. We then used the absolute lowest end of that range for our base projections to which we added a further reduction for prudence, and a contingency reserve for the unexpected, both of these going directly to the bottom line.

-- Next, fiscal gap in hand, we then set the individual departmental targets that would be required if we were to achieve our campaign promise of cutting the overall deficit in half to 3 per cent of GDP in three years, at the same time setting us on the road to a zero deficit shortly thereafter.

-- Third, we made it clear we would achieve those targets come hell or high water – and we did. Because the cuts were sharp and deep they worked – the vicious circle turned virtuous and the positive payback was not long in coming. In 1998, we announced that the deficit had been eliminated.

-- We continued to pay down the national debt, our debt-to-GDP ratio dropped below 30 per cent and our annual surpluses were of such a size that we began to be criticised for them as much as our predecessors had been criticised for their deficits.

The Canadian reforms were a success as their starting point was to change the structure of government itself. An approach of simply doing the same thing but at a lower cost was not seen as enough. Other key elements in the success of these reforms were:

-- Targets were set that applied within the electoral cycle – as when elections take place before a target needs to be met, political accountability is lost and the bureaucracy postpones the day when they have to find savings.

-- An across the board approach to cuts was rejected as some areas would be cut to the bone while others would be left with fat to slice. No areas of expenditure were off limits. Focus went beyond merely limiting the growth of expenditure and making ‘efficiency measures’ (which may help reallocate expenditure but not reduce debt).

-- The public was engaged on targets and potential cuts in a way that encouraged interest groups, the media and individuals to develop mock budgets in response to this consultation. This involved the release of major background papers and an extensive round of public hearings.

This discussion highlights a key lesson from the Canadian experience for the UK. Public engagement, while essential, is not sufficient by itself. Engagement has to be supported by political leadership – without leadership there is a risk that ideas generated by public opinion will largely reflect emotional prejudices not the real challenges the country faces.

Further information

Bassett, D., T. Cawston, A. Haldenby, P. Nolan, L. Parsons, N. Seddon and K. Trewhitt (2010), Budget 2010: Taking the tough choices, Reform.

Martin, P. (1995), ‘The Canadian experience in reducing budget deficits and debt,’ Proceedings, Federal Reserve Bank of Kansas City, pp. 203-225.

Nolan, P (2010), ‘The First Hundred Days,’ The First Hundred Days, Reform.