By Dr Patrick Nolan, Chief Economist, Reform
It is well understood that not only does government spending need to come down but that a detailed plan to do this needs to be set out. In developing a plan there are a range of international examples that can provide insights on what would likely work – or what would not. One example of a country often used as an example of how to restore fiscal credibility is Canada in the 1990s. This was the first G7 nation to return to budget balance after the recession in the 1990s, the debt-to-GDP ratio was reduced by 20 per cent (the largest decline among G7 nations) and unfunded pension liabilities were addressed. So what are some of the key lessons from the Canadian reforms – particularly the 1995 Budget?
The starting point for the Canadian reforms was the need to permanently change the structure of government itself. Aiming to simply do the same things but at a lower cost was not seen as enough. This desire to change the structure of government was then translated into action through three main elements: targets were set, cuts were allocated and the public was consulted.
Setting targets was important for restoring fiscal credibility, which had been damaged by previous governments over-promising and then failing to achieve their goals. New targets were set to apply within the electoral cycle. It was argued that when elections take place before a target needs to be met, political accountability is lost and the bureaucracy postpones the day when they have to find savings.
The second element was for a special committee of Ministers to examine virtually every government programme to identify where government support was still justified and to find better ways to deliver services. Nothing was off limits. An across-the-board approach to cuts was rejected as some areas would be cut to the bone while others would be left with fat to slice.
The third, and most important, element was to engage the public on targets and potential cuts. A consultation process was initiated four months before the 1995 Budget, which included the release of major background papers and an extensive round of public hearings. Interest groups, the media and individuals developed mock budgets in response to this consultation. This not only unearthed a wide range of options for reform, but helped shape expectations regarding the magnitude and general nature of the actions needed.
By cutting back its own activities, rather than putting the burden of deficit reduction onto taxpayers, the Government ensured the popularity of these cuts. Their popularity was also supported by evidence that reducing debt would help ensure ongoing delivery of social services and help increase jobs and growth, as sound government finances and a sound economy go hand in hand.
The key lesson from the Canadian reforms is that, as Andrew Haldenby recently argued, getting the public to support tough measures requires them to feel part of the process. This need for openness with the public contrasts with the approach of Prime Minister Gordon Brown, who has argued that it would be a mistake for the Government to set departmental budgets for up to three years ahead at this time, and the Business Secretary Lord Mandelson, who has argued that plans for a department-by-department spending review ahead of the election have been abandoned.
Chancellor Alistair Darling has, however, hinted that the government could still hold a public spending review before going to the country in a general election. As he noted, both political parties will have to set out their stalls as the next government will have to take difficult decisions – and these decisions will require a mandate.