The Canadian model of cutting budget deficit in the 1990s seems to have caught the imagination of the new coalition government and the media alike in Britain. But can it really be applied in Britain? This piece from eGov monitor explores the question.

In the 1990's the Liberal administration of Prime Minister Jean Chretien transformed a budget deficit of 9.1% into a small surplus within a period of 5 years. David Cameron wants to emulate Mr. Chretien but his task is significantly more difficult.

To begin with the former Canadian Prime Minister had to reduce a deficit of approximately £25 Billion pounds while the Conservative-Liberal Democrat administration in Britain needs to reduce 5 times more or £156 Billion. Mr. Cameron also faces other major constraints such as ring fenced health and education spending as well as political compulsions.

How did Mr. Chretien do it?

Earlier today, the Institute for Government released a report “The Government of Canada’s experience eliminating the deficit, 1994-99: a Canadian case study” authored by Jocelyn Bourgon a former senior civil servant in Canada. In this report Ms. Bourgon lays out the “Program Review' process which involved each government department, agencies as well as quangos and not a single programme was exempted from this review.

The review explored in detail each activity’s necessity and whether the federal government was best suited to deliver a particular programme. It examined if the activity could be devolved to the provincial level as well as whether the programme would be best delivered by the private or the voluntary sector.  When it became clear that the government had to continue to deliver a particular service then only the efficiency of delivery came under scrutiny.

The whole process was delivered through an “impressive partnership” between civil servants and ministers and was very ably led by Prime Minister Chretien who enforced disciplined and provided political cover and support.

The Institute for Government’s report concludes with some of the lessons learned which include the following:

•     “It is a societal project – it involves an open and inclusive approach that engages the whole of government, and not just a small number of people working in relative secrecy.
•    a large scale programme makes possible reforms that alone would not normally be possible
•    speed is important if there is a high level of consensus in society – it creates light at the end of the tunnel
•    a high degree of prudence was built around Programme Review
•    luck – the Canadians were lucky there were no major external shocks during the time
•    it is possible to lead ambitious reforms and make choices in a principled and defensive way, rather than just make easy, unsustainable cuts.”


Can Mr. Cameron emulate Mr. Chretien?

Mr. Cameron could well succeed in emulating Mr. Chretien in developing a coherent administrative process through which cuts are made in consultation with stakeholders and especially the public. However, this publication argues that Mr. Cameron is politically far weaker and Britain is a very different country.  

Mr. Chretien had a commanding majority of his own party in House of Commons in Canada while David Cameron leads a coalition government made up of centrist figures where backbenchers of both parties have serious reservations about his government.   While a decade and a half later, Chretien’s success is well regarded on both sides of the Atlantic, the Canadian public was not so forgiving in the 1997 elections where Jean Chretien almost lost his majority in the House of Commons.  Our Prime Minister cannot afford to take such chances politically.

The Canadian Government, in its efforts to reduce the deficit, readily made significant cuts in the healthcare and education budgets which in the case of the UK are ring fenced and politically unviable for the coalition government.  Further, the British public views NHS as a national institution and  any attempt to close hospitals would be met with serious public disapproval. During Chretien’s first term in office, the number of children in a class increased from 25 to 35 which also would be simply unacceptable in Britain.

While everyone accepts there would be redundancies in the public sector, it is inconceivable to assume the British Government would be able to follow the Chretien Government’s example of reducing over 10% of public sector jobs in a very short time span.  The unions are already challenging the Prime Minister’s argument stating that the financial services industry is largely responsible for the fiscal crisis Britain faces and the public sector workers should not become scapegoats.  Further, the debate that has accompanied the £6.2 Billion spending cuts which represent only 1% of our total public sector spending almost ensures that Mr. Cameron and his Government would not be able to cut spending as much as Mr. Chretien, who cut public spending by one fifth of the entire budget in a single fiscal year.

Finally, the two economies have significant structural differences – we are a small island with almost 70 million people dependent highly on the City of London and the service sector and we are a net importer of energy, while Canada is a huge country with considerably less population than the UK and vast natural resources including oil.

So while there are some lessons that Britain could learn from the Canadian experience let us not forget we are in Europe and Canada is in North America – there is a huge cultural difference and what is possible there politically would surely be suicidal especially for a Prime Minister leading a fledgling coalition.

The US experience in the 1990s

A discussion on public sector deficit reduction surely must also include the very successful Clinton economic plan that was very contentious in 1993 but now is recognised as transformative for the US economy.

1.    The Clinton Administration focused on cutting the public sector deficit by cutting spending over a 5 year period – which worked because it meant lower interest rates all around and the impact of the sovereign bond market on the economy was as important then as it is today. The spending cut was almost equal to about $255 Billion over 5 years and the deficit was reduced by $500 Billion.

2.    Tax credits were offered to middle class families – through HOPE TAX Credits And Earned Income Tax Credits. This helped middle class and low income families send their children to universities.  The tax credits along with the  deficit reduction measures allowed for lower interest rates which in turn ensured lower cost of borrowing for mortgages as well as business growth. The Clinton Administration also provided incentives for R&D and innovation which played a role in transforming the technology and economic landscape

3.    Tax was increased for the highest 1.2% tax payers where the nominal income tax rate was increased at the highest level to 36% with a 10% surcharge for the highest earners. while cutting taxes for most lower income families. Clinton also increased the top rate of corporate tax rate to 35%

Could Britain learn anything from the Clinton model?