Cameron drawing wrong lesson from Canada


10:20 am - June 14th 2010

by Sunny Hundal    


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Economists say that David Cameron is drawing the lessons from their country’s deficit reductions plans during the 1990s.

Last week the Daily Telegraph reported:

Senior Conservatives, led by Mr Osborne, have examined the Canadian model while in opposition and have taken advice from those involved. The idea of a star chamber – copied from Canada – will transform the way spending rounds are carried out. A committee of around four senior ministers will “test” the claims of each department before their multi-billion pound budgets are agreed.

The newspaper said that George Osborne was planning to eradicate Britain’s budget deficit by emulating Canada, where borrowing was brought under control within just three years by spending cuts of 20%.

But Marshall Auerback, senior fellow at the Roosevelt Institute, with 28 years of investment management experience, argues that:

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 (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, 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 significantly stimulate consumer spending, and which was sustained until the financial crisis.

He adds that Canada’s turnaround was “largely made possible through a revival of growth in the US (Canada’s largest trading partner)”.

The UK has no such option because the EU, our biggest trading partner, is similarly stuck in a rut.

Auerback adds:

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.

And yet Cameron and Osborne are planning to follow the same paths without learning from Canada’s experience in context.

A poll by YouGov published yesterday found that 49% of the public think the government should raise taxes to reduce the deficit.

Only 39% said the government should not raise taxes at all and instead focus on cutting spending.

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Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


1. Flowerpower

Sunny

A poll by YouGov published yesterday found that 49% of the public think the government should raise taxes to reduce the deficit.

Which taxes would you raise?

Polly Toynbee has argued in favour of (amongst other things) a VAT hike. Ed Balls, however, is dead set against a VAT increase.

Polly also argues for an increase in the basic rate of income tax by around 3p in the pound and a lowering of the threshold for the 50% rate. What she doesn’t explain is how taking such large sums out of the economy could do anything other than choke off growth and lead to more recession.

I’m sure George Osborne is very well aware of the fact that Canada enjoyed a fairer economic wind when it made its cuts than we will, just as he is aware of the parlous state of the economies of our various customers in the EU. He will also understand that Canada’s job was easier in that its federal structure enabled the national government to outsource the politically difficult cuts to provincial government – not something one could get away with here.

So for us it will be tougher.

Does anyone in the senior ranks of Labour have a realistic plan as to what proportion tax cuts, spending cuts and growth should play in getting us out of this hole? If so, why are they sitting on it?

The very phrase “star chamber” has been used before when there are disputes over allocations – usually cuts – in Britain. Surely it comes from the mediaeval “Court of Star Chamber”?

Looks like an attempt to build up Osborne vs others inc Alexander and the National Liberals.

There will be degrees of commitment to slash and burn, and Osborne, who thought flat rate tax “interesting” a couple of years back will not be reticent, however he spins his PR.

“Not me, the bad star chamber did it, but we much be fiscally prudent . . ” et passim.

Cameron gets a bit of a telling off from the BDO for scaremongering business into the biggest drop in monthly business confidence since their records began.

http://redrag1.blogspot.com/2010/06/red-rag-i-dont-like-saying-i-told-you.html

Raising VAT is not only unfair on those fro whom this is the only or main tax they pay but it is also inflationary, as Howe & Thatcher found when they doubled VAT from 8 to 15%. That is why Osborne has to think twice about doing it, otherwise – no problem.

The deficit is not a pressing problem, as is dissembled by those who principally wish to cut the state and taxation as a social tool to the subjugation of those whom they see as untermenschen.

Darling’s pre election plans evidently would have achieved his target of a 50% reduction in debt by 2015.

“The smart pace at which the level of government borrowing has been falling in recent months, in tandem with rising growth in recent quarters, has increased the prospect that growth will restore the public finances to health without the need for wholesale spending cuts or tax increases.” – FT

Whatever happens don’t forget to panic, will be the Billionaire Press message. Alternatively: : http://url.ie/6ia0

5. Richard Blogger

@Quietzapple

Yup, everything about Cameron’s government says “its not our fault”. Their whole small state idea is to shift public sector workers over to the private sector so that the nasty private sector can cut their wages, pensions and ultimately sack them. The very fact that the OBR was created is Osborne showing that he is incapable of shouldering any responsibility – he will blame any down turn on the OBR figures. The formation of the super-quango, the NHS Board, is Lansley refusing to take responsibility. The NHS Board will be tasked with privatising NHS services (sorry, the term is that they will create “commissioning guidelines” since those guidelines will exclude NHS hospitals are, of course, purely coincidental). So in 5 years time when we have an expensive, privatised healthcare system Lansley will say “it wasn’t my decision, the NHS Board said it was the best way to do things”.

Basically Cameron and his coterie are incapable of taking any responsibility.

In macroeconomic terms, there is no difference between a tax increase and a spending cut; both take money out of the economy and use it to pay off government debt.

If the argument is against a fiscal contraction, then arguing for tax increases is just as wrong as arguing for spending cuts.

7. Luis Enrique

Richard

In macroeconomic terms, there is no difference between a tax increase and a spending cut

I wouldn’t say there was no difference; clearly the latter can affect public sector workers and output directly whilst the effects of the other are more diffuse, but you make an important point.

One could get the impression for the OP that spending cuts imperil growth and cost jobs, whilst tax increases do not. That is certainly a mistake – roughly speaking, tax increases “take money out of the private sector” and that will cost jobs and imperil growth too. It really isn’t obvious to me that the left wing ought to have a preference for job losses in the private sector over job losses in the public sector, especially if it’s possible to make public sector cuts in places like this.

Thanks to Sunny for digging out Marshall Auerback’s assessment of Canada’s experience in cutting the fiscal deficit there.

The basic issue for Britain is what will make up spending power in the economy when public spending is cut back by the government?

The hope is that export sales and the private sector will make up for public spending cuts. But the Eurozone economy is fragile and the Pound has appreciated against the Euro in the last 3 months from a Euro worth 91p in March to about 82p now. In the first quarter this year, business investment was running 11% down on the same period a year ago. As for retail sales:

“Year on year, the volume of retail sales in April was 1.8 per cent higher than in April 2009.”
http://www.statistics.gov.uk/cci/nugget.asp?id=256

Where will growth in total spending come from if consumers are being urged to pay down debt and save more?

9. Richard Blogger

@Richard Gadsden

“In macroeconomic terms…”

You have just given the best explanation why economists should not be in control of the economy. As we all know, there are HUGE differences between spending cuts and tax rises, and the decision whether to have one or the other is political.

10. Richard Blogger

Anyone notice this tweet from Paul Mason?

http://twitter.com/paulmasonnews/status/16136849020

“Now conservative spads briefing obr is optimistic on several counts and osborne will factor in worse case in budget”

Wasn’t the whole idea of the OBR to provide reliable and incontrovertible figures, so surely by saying that OBR “is optimistic” means that the government does not trust their figures? This new politics is so much like the old politics.

11. Flowerpower

Quetzapple @ 4

Darling’s pre election plans evidently would have achieved his target of a 50% reduction in debt by 2015.

Nonsense. Darling himself admitted that debt would double by 2015.

He made no plans to reduce debt.

Darling’s plan was to halve the deficit, not the debt. His plan to do that involved 50 billion in spending cuts.

The deficit is not a pressing problem

It is pressing, because if it is not reduced sharpish, interest rates will rise and we can kiss goodbye to any hope of things getting better for a generation. Besides, who on earth would lend us the money to sustain the deficit? We’d be bust. And Germany sure won’t be bailing us out.

To get rid of the deficit through tax rises (assuming 0 growth, which wouldn’t be a rash assumption if this route were taken) would require every single tax payer to cough up about 5 grand per annum extra. If you insisted that only the rich paid, then the top 1% would have to cough up £500,000 each per annum. That wouldn’t work ‘cos to get into the category of ‘top 1%’ you only need to be earning £150,000. Just taxing the top 10% doesn’t work either – for the same sort of reason.

Contributors are dodging the issue about what sources of spending will make up for the cuts in public spending.

The so called star chamber will have 4 tories and 1 Lib Dem, and he is already at the treasury.

Does not sound like a joint govt to me. More like a tory stitch up. I think the Lib Dems are sleepwalking into a nightmare.

Worth noting that the legendary budget surplus under Chretien quickly evaporated after the Tories took power

“In macroeconomic terms, there is no difference between a tax increase and a spending cut; both take money out of the economy and use it to pay off government debt.”

This is puerile analysis. The affects can be very different. The macroeconomic impact of a tax increase varies greatly on at least two things – a: what tax is increased (and the tax elasticity of what is being taxed: consumption effort investment etc) and b: the rate at which the tax is currently set.

Similarly, the macroeconomic impact of a spending cut varies. Any growth theorist worth his salt would tell you that cutting investment in basic science would have a large long run macroeconomic affect that dwarfs its current impact. The same would likely be true of decreases in infrastructure investment.

It is this kind of silly simplistic analysis that leads people to think Labourites know nothing of economics.

@15: “It is this kind of silly simplistic analysis that leads people to think Labourites know nothing of economics.”

I’m entirely mystified as to how or why Richard Gadsden’s economics @6 is attributed to Labourites in general.

It happens that several academically distinguished economists are declared supporters of the Labour Party – for example the Labour peers Lords Desai and Peston.

Btw I didn’t vote Labour at the election.

@16

There are many fine economists including Desai who support Labour. There are a great many more who — if forced to make a Hobson’s choice between Labour and the Tories — would pick Labour. None of them would make this sort of driveling comment that was made @6.

However; time and time again on blogs I see this kind of stupid sub-Keynesian stuff wheeled out by overconfident people who have a year of undergrad economics under their belts and nary a thought in their heads. I think that the frequency of such comments does a great deal to undermine the credibility of Labour supporters.

@13

My guess is that the LibDems have taken a long hard look at their colleagues in Germany, the FDP and their history. Before the event known as Die Wende — the change — the FDP supported to SDP and were social liberals and economic (soft) leftists. Afterward Die Wende — when they shifted to support the CDU — they were social liberals and economic liberals. I think Clegg and co see this coalition as a similar sea change for the LibDems. They have given up their claims of equidistance between Labour and Tories and will — I think — sell themselves as fiscal hardmen who are; however, non-authoritarian. I suspect it may work well for them.

As a Brit watching the UK elections from afar (Thailand), for the life of me I couldn’t figure out why so many people voted for Cameron anyway? He obviously doesn’t have a clue yet, when the world’s economy is in such a mess, I guess a lot of Brits just HAD to blame someone, so they chose Gordon Brown. How about the banks and the rich (ie: the conservatives) who got the economy that way in the first place?


Reactions: Twitter, blogs
  1. karen birch

    RT @libcon: Cameron drawing wrong lesson from Canada's austerity programme http://bit.ly/cNX2Nu

  2. catherine jamieson

    RT @libcon: Cameron drawing wrong lesson from Canada's austerity programme http://bit.ly/cNX2Nu

  3. yorkierosie

    RT @libcon: Cameron drawing wrong lesson from Canada's austerity programme http://bit.ly/cNX2Nu

  4. carrie JS

    RT @libcon: Cameron drawing wrong lesson from Canada's austerity programme http://bit.ly/cNX2Nu

  5. Peter McColl

    Excellent explanation of why Canadian cuts are unlikely to provide a blueprint for the UK: http://bit.ly/9Mr4Y6 US growth mostly responsible

  6. Liberal Conspiracy

    Cameron drawing wrong lesson from Canada's austerity programme http://bit.ly/cNX2Nu

  7. Rogue

    RT @libcon: Cameron drawing wrong lesson from Canada's austerity programme http://bit.ly/cNX2Nu

  8. AndyG

    RT @libcon: Cameron drawing wrong lesson from Canada's austerity programme http://bit.ly/cNX2Nu

  9. LMO

    RT @libcon: Cameron drawing wrong lesson from Canada's austerity programme http://bit.ly/cNX2Nu

  10. Web links for 14th June 2010 | ToUChstone blog: A public policy blog from the TUC

    […] Cameron drawing wrong lesson from Canada | Liberal Conspiracy Sunny has some good sources here […]

  11. One-Club Osborne drives economy further into the rough | Left Foot Forward

    […] was given plenty warning – Canada attempted a similar experiment in the 1980s, but a booming export market in the US was responsible for solid growth, alleviating […]





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