Message to Britain: Don’t Follow Our Lead on Austerity

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June 21, 2010

In his column today in The Guardian, Will Hutton is the latest pundit to suggest Canada’s example from the mid 1990s is the right way to tackle austerity.

Hutton’s aim is true.  He knows the current proposals for balancing the books will unleash “the needless squandering of [British] lives.”  In his effort to point to a more sensible path he makes five assertions regarding Canada’s handling of deficits that he believes reduced unnecessary pain and generated growth, making Canada a template to follow in deficit-reduction planning. They are five excellent principles, but Canada didn’t follow them, and the UK would do well not to follow our lead.

1) The austerity plan was driven by extensive consultation and sensible economics.

There was indeed extensive consultation in the months before the February 1995 budget, and many groups urged the Liberals to consider more than just spending cuts as the way to balance the books.  But the country’s most successful pressure group was the financial press, which relentlessly reported for months that Canada was about to hit a “debt wall” and advocated for smaller government, i.e. spending cuts.  At the time, Canada had the second highest debt to GDP ratio in the G7, after Italy. Moody’s and S&P were threatening to lower our credit rating, which would have raised the costs of servicing debt.  In 1994-95, 34 cents out of every dollar of federal revenue was already going to debt charges.   Does Britain face this situation?  Not at all.  Its debt is not large by international standards (in 2009 it was actually lower than Canada’s) and it is not being stalked by the credit rating agencies.

2)  The cuts built a platform for growth

The sequencing of cuts and growth was purely coincidental. Massive federal cuts in 1995 further prolonged the recession that started in April of 1990.  Growth finally started picking up in 1997 based on the rise of commodity exports, primarily the result of rapid expansion in economies like China and India.  We were exporting the raw materials that fueled the manufacturing explosion underway in these nations.  Canadian manufacturing also rose between the mid 1990s and 2000, driven by exports to the US, but has been shrinking ever since. Canadian spending cuts had nothing to do with the emergence of new industrial powerhouses or American consumers’ purchasing power. Public policy in the 1990s did not create a platform for growth; the happy accident of an extraordinarily rich natural resource base did. Britain cannot count on similar blessings.

3) Canada did not rush to balance the books.

Hutton argues that the Brits should rethink their rush to balance the books and follow the model of the Swedes and Canadians. He mentions it took the Swedes 15 years to balance the books.  The British government’s proposal is to balance the books in 5 years, which Hutton sees as too quick. Canada is therefore no exemplar for Hutton. Budget 1995 envisioned balanced budgets at the federal level in 5 years.  Balance was in fact achieved in less than two years (before the end of the 1997-1998 fiscal year), testament to the severity of the cuts.  By 1998 the federal government was playing the “what shall we do with the surplus” game.  Alas, the services cut in order to balance books were, by and large, never restored.

4) Aggressive belt-tightening released spending later.

Aggressive belt-tightening led to surplus budgets which released a massive wave of tax cuts.  The first major round of tax cuts was the 5-year $100 billion promise by the Liberals in 2000.  Harper’s Conservatives took office in January of 2006, and introduced another $220 billion in tax cuts.  That’s what they did with the surplus.  We were en route to a structural deficit at the federal level before the recession even hit.

Spending did increase, but not in the form of restoring social programs that had been gutted. Health care spending alone was restored, and it took until 2003 to get there. Housing, unemployment insurance, transfers to provinces for post-secondary education and welfare, children’s aid, homecare services, legal aid and women’s shelter services remain sadly underfunded or without federal support at all. A range of federal services, from transportation to food inspection were also cut or privatized. Meanwhile, military spending has doubled since 1995 and other measures for security and policing have hugely swollen budget lines.

Yesterday’s austerity has done nothing to secure spending for the basics today. Publicly funded health care is under renewed threat and officials who were at the helm in Finance in the mid 1990s are now advocating for a two-tier system for necessary medical services: user-pay for those who can afford to, and publicly funded for those who can’t.  We all know what that means.  Austerity is not a one-size-fits-all proposition; which is what Hutton acknowledges in his final suggestion for how to balance budgets well.

5) The poor were “insulated” from the cuts.

The Canadians hit hardest from the cuts of the mid 1990s were the unemployed, the ill, vulnerable children, students in the post-secondary system, immigrants and women.  The burden fell heaviest on women because 1) they picked up the slack in unpaid labour for services that were cut (for example, people released from hospital earlier to recuperate at home, or people waiting at home for hospital care longer than previously because of cutbacks);  2) they increased their educational attainment so they could get paid more in the labour market, just as tuitions were de-regulated and more than doubled in cost, leading to unprecedented levels of student debt for many; and 3) they just kept working more to make ends meet as fewer services were publicly funded, and basics grew more costly – like the rising costs of housing, transit, health care, and education.

Those who were most insulated from the cuts were the rich.  They were the least affected by the service cuts, and the primary beneficiaries of the era of tax cuts.

Hutton portrays the enormous sacrifices made in Canada as being legitimated by the outcome, but Canada balanced its books on the backs of the poor, particularly on the backs of women, and they have yet to see the benefits of these sacrifices or the economic growth that has occurred since. Household incomes have been stagnant or worse for the majority, public services a shadow of what they were and poised to be cut further. Inequality has galloped ahead at a pace unseen since records started being kept, and it is by no means clear where the next middle class is going to come from for the next generation.  The explosion of activity in emerging nations has kept our economy humming through the extraction, not the development, of our resources. This is the tattered legacy that Canada offers the world. When it comes to deficit-fighting and building resilience for the future, we could all find a better model. Perhaps we could start with Mr. Hutton’s principles.

This commentary  was first featured on The Progressive Economics Forum blog.

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