With all the talk now turning to the current Government following the Canadian model of cutting public spending during the 1990’s, its worth highlighting two articles one from a well renowned economist and one from a political editor on the pitfalls of simply transferring one country's experience to another.
The first is from the Independent's Political Editor Andrew Grice today he writes ‘The key questions posed by the Canadian government – such as should the state really be providing this service, should it be handed to the private or voluntary sector – were reproduced faithfully in a Treasury document this week. The coalition also aims to adopt Canada's open and inclusive approach to take people with it, although that will be hard. Another lesson is that speed is important to create some light at the end of the tunnel.
Yet the parallels can be overstated. Jocelyne Bourgon, a senior civil servant in Canada during the period, admits in a report for the Institute for Government that one crucial ingredient was "luck" – that there were no major external economic shocks.
Mr Cameron and Mr Clegg may not be so lucky. Canada had the United States economy next door to help it grow. On our doorstep, European governments queue up to wield the axe even where, as in Germany, economists say they don't need to. This "competitive austerity" could result in a huge rise in unemployment across Europe, destroying the coalition's hopes of claiming the progressive label. Mr Cameron and Mr Clegg need a growth strategy as well as a cuts strategy.
The second piece is from Paul Krugman entitled Oy Canada’ he writes ‘Marshall Auerback points out that the new UK government, in arguing that fiscal austerity won’t destroy the economic recovery, is pointing — wrongly — to Canada’s experience in 1990’s Actually, it’s even worse than Auerback says.
As he points out, Canada was able to offset the contractionary effects of fiscal austerity through increased exports to a booming US economy. What he doesn’t point out is that this export boom had a lot to do with exchange rates between the Canadian and American dollars.
Yep, you can have fiscal austerity without contraction if you have a massive devaluation against your main trading partner. So we can have austerity without a new depression as long as all the world’s major economies devalue against … oh, wait.
And monetary policy, of course, wasn’t up against the zero lower bound, so the Bank of Canada could and did offset fiscal austerity with looser monetary policy (which partly explains the drop in the loonie.)
I do feel a sense of despair here. Ever since the crisis began, some of us have been trying to get across the point that you have to be very careful with your historical precedents, that things work very differently when you have a synchronized severe financial crisis, with interest rates near zero everywhere. And here we are, two years in, and it’s as if we’ve been talking to a wall.
Better economic growth is something that I have been banging on about for a while to counteract some of the job losses and withdrawal of services ahead, but unless I’m wrong the new Government’s strategy seems to be cut the deficit and keep their fingers crossed for private sector growth to return, if the UK is in line for a 20% reduction in spending this, then ignoring where the growth will come from is ill thought out at best and downright dangerous at worst. (Labour was no better on growth either)
Let’s hope David Cameron and Nick Clegg are shrewd enough to not blindly follow Canada’s example or things could be even worse than predicted especially with the UK's main trade partners Europe where each country is now in a race to see who can cut their budgets the hardest and fastest.