Copy Canada to defeat the problems of public debt and spending

In the 1990s Canada was a ‘basket case’ in terms of its public finances, but took the necessary action to rectify its situation.

The UK had a record deficit in August, which is no surprise to me, any more than the fact that this is being followed by warbling by all and sundry, including some who should know better, about how the coalition government should be excused from its miniscule deficit reduction targets and polls about how people would like government to spend more. Really?  How surprising-like all those rounds of applause from TV audiences when someone says “Stop austerity”. If only a vote or a round of applause were all it took. 

Meanwhile this article in a Vancouver newspaper reviews how the Canadians escaped their plight. It’s a short article and worth reading. Here are three telling quotes from it:

1. ‘We came to understand that if we wanted to save health care, we had to cut everything, including health care.’

2. ‘No carve-outs were permitted for defence or transport subsidies or social programs.’

3. ‘Every government that grasped the nettle of reform didn’t merely defeat the deficit, but enjoyed tremendous public support and was handily re-elected.’

The degree to which ideologues on the left have been allowed to frame the parameters of debate is not fully appreciated-we are not even allowed to question NHS spending any longer. The irony of this, as the Vancouver article suggests, is that in the end the crushing deficit which will result from the literally impossible task of funding the NHS will destroy or irreparably damage it. The article also gives the lie to the suggestion that telling people the harsh truth about our situation makes a politician unelectable.

 

Comments

[Chris]

How refreshing to read something that makes sense - in particular that parties, I read that as everyone, "ceased to treat it (the deficit) as a matter of partisan contention"

[MickC]

Indeed telling the truth does not make a politician unelectable-but telling the truth about the problem and then shying away from the medicine most certainly does.

Our present government is a perfect example.

[John Hayes]

Terry, you will be encouraged by the speech of Richard W Fisher, a member of the committee chaired by Bernanke, to the Harvard Club of New York on September 19. He opposed the latest QE, saying that even one or two percentage points of interest lower would not persuade some very large companies he knows to invest more.

[Derrick Wilkinson]

An interesting question is why it happened there,why politicians there had the courage and insight, but not elsewhere.

[Nick]

The Canadians are to be congratulated. Not much hope of serious deficit reduction in Britain. The big news stories today are what a bicycle riding MP might have said to a policeman and Nick Clegg's wish to take more tax off people who run a surplus (rather than a deficit). Another word for these people is "savers". With people like Mr Clegg "running" the country what hope of ever having a proper conversion about serious deficit reduction. He cannot see that the bigger the deficit gets and the more he taxes the worse the situation for those truly dependent on the public purse will get.

Unfortunately we now have too many people getting rich off the public purse. The latest type seems to be the overseas aid consultant, boasting about how much money is to be made from the aid budget.

It will eventual stop, either by design or default. In the meantime it may be best to move to Canada.

[Terry]

Why be such a democraphobe, Terry? You sneer at 'polls' but then post an article that shows the democratic majority SUPPORT cuts by re-electing those politicians who make them.

Be a democratist, not a democraphobe.

[Terry Smith]

Terry: I am a democrat. What I ridicule is a survey which asks people if they would like the government to spend more. The result is as predictable as it is irrelevant. The question should be: “Do you want the government to spend more of our money?” That might get a different and more useful answer. I am at one with the environmentalist Edward Abbey who wrote, "A patriot must always be ready to defend his country against his government” . (Quoted in the movie JFK)

[Terry Smith]

Nick: I intend posting on Mr Clegg tomorrow. He clearly should study this quote from the Canadian article ‘'We had a spending problem, not a revenue problem, and it required less spending to solve it.' As he is quoted in the newspapers this morning as saying that he would oppose any further spending cuts I take that this line of reasoning is lost on him.

[Chris B]

Hi Terry.

The funny thing is I believe 99% of people know that cutting the deficit is the only solution from their own experiences. But, disingenuous politicians are telling them that it can be averted with no pain; if people can get something for nothing, they sure as hell will try.

What we need is for real people like you - successful hard-nosed business people who know how to bring down costs and increase profits - to be brought forward into top jobs in government - other than some 'Lord' Sugar style stunt - to run the economy and the public sector.

As the owner of a moderately successful company myself which employs 16 staff, I have had to make terribly hard choices: i.e. laying off staff who have helped me in the good pre-crash years, in order to allow the whole business to survive longer term. It hurts, but it needs to be done; the same is true with the macro-economy.

Today's political class does not have that experience. They all seem to have the same career: University - Think-tank - Backbenches - Cabinet. With no history of business or hard choices, they are inept at helping/making them and so are totally fixated by the status-quo of a tax and spend Public Sector.

[Alcuin]

So if we are to believe this (and it worked for Canada and makes sense to me), Thatcher's simplistic household budget approach to government funding is right and Balls, Krugman and the 365 economists of the 1982 letter are wrong. Or to put it more simply, common sense works and intellectual tricks do not.

Something most of this country knew already until they were told by people far smarter that we were that money grows on trees, we can breed geese that lay golden eggs and there are fat pink creatures cruising in our skies. George Orwell and Thomas Sowell are right about intellectuals - they are smart enough to convince themselves of such things, and to do for us all with their plans.

[Jeremy]

The Canadians forgot to mention that a mining boom for a country rich in resources is quite handy for recovery

[Terry Smith]

Jeremy: So the Canadian's policy choices were irrelevant. How shocking. What we need to do in the UK is continue with the borrow and spend policies which got us into this mess rather than trying to adopt policies which others have demonstrably succeeded and meanwhile wait to discover some natural resources?

Chris B : I agree. Time was when politicians had a career in the real world before they entered politics or sometimes in addition to their political role. Of course in the Alice Through the Looking Glass world of modern politics, having experience of business is a stick to beat a candidate with (Romney) whereas having achieved precisely nothing before becoming a candidate is an advantage (Obama).

[Thomas]

There are four prongs of deficit attack.

Revenue spending has to be drastically cut. EG We need a hated team of auditors roving around government, comparing one dept with another and have the POWER to slash.

We need more indirect taxes (VAT). The argument that VAT is regressive is false. Basics are exempt and the rich will pay more because they spend a lot more. The big retailers will moan but get over it. Higher income based taxes will just be avoided or moved away from.

We need to move revenue spending to capital to not create large unemployment in the public sector.

We print money not borrow it. That will help all those in debt and house prices.

Balance that lot and we might have a chance.

[amedin]

Terry,

I've posted this before, the last time you referred to an article that lauded the Canadian model:

"I enjoy reading your blog but I hope you'll forgive me if I inject some caution. I wonder if the Reuters article has not fallen into a similar trap as most articles regarding current UK 'austerity'. In other words, the journalist believes the political hype without checking the hard numbers.

I looked into the 1990s finances of Canada a couple of years, when the Canadian 'model' was being widely used as an example of how the UK could be saved.

I no longer have the data to hand (it took a long time to find, I think via Statistics Canada). However my memory is that Canadian government spending did not decline during the 90s.

In fact the Canadian 'model' appeared to be very similar to that currently adopted by the UK. They slowed down government spending and then relied on GDP growth to reduce the relative (not absolute) size of the deficit.

GDP did grow but not because of the actions of the Canadian government. It grew through:
1) the knock-on effects of a strongly growing US economy in the late 90s
2) the subsequent boom in oil (and other commodity) prices. As you know, Canada is a commodity economy.

Anyway, you have access to large research department, so they could dig out all the budgets.

Again from memory, I recall one had to be very careful not to confuse the planned spending for subsequent years with the actual spending (also a bit like the current UK situation)."

I'm afraid to say that although the Canadian government made a big hoo-haa about deficit reduction, the published stats don't seem to back it up.

So, as you mention above does that mean the UK should continue to borrow & spend? No, of course not, but I hope it highlights that, politically, it is extremly difficult to cut government spending. Everyone hates having something taken away from them.

[Andrew]

Actually, Terry, I think you'll find that growth kicked in *before* the Canadian government initiated its deficit reduction plan.

http://www.fin.gc.ca/budget95/speech/speeche.txt

That was (and is) the correct approach.

However, since this is a global recession (and interplanetary trade doesn't seem a viable option in the near term), the UK can't offset its deficit cuts with export-led growth.