Reality check on star chambers and fiscal deficits: A view from Canada

Our guest writer is Eugene Lang, co-founder of Canada 2020: Canada’s Progressive Centre; he was an adviser to ministers in the governments of Jean Chrétien and Paul Martin, including one of the ministers on the Cabinet committee on ‘Program Review’

Word has drifted across the pond that the Cameron-Clegg coalition government is looking seriously at the Canadian “Program Review” experience of the mid 1990s as something to emulate to wrestle the British government’s deficit to the ground. The Canadian experience at deficit elimination is worth looking into, but don’t be fooled by the mythology.

In the mid 1990s, Canada faced a severe fiscal crisis. The Wall Street Journal called Canada a banana republic. At one point it looked like the government might fail to successfully float a bond issue.

So beginning in 1994-95, the federal Liberal government, led by prime minister Jean Chrétien and Finance Minister Paul Martin, started to get serious about deficit reduction. And much to the surprise of the experts and the markets – not to mention the government itself –Canada put an end to 25 years of red ink within 3 years of serious effort.

But ‘Program Review’ – a process designed to examine rigorously every federal departmental programme and apply a series of tests to determine if they should be reduced, devolved, or eliminated – was a relatively small part of the effort.

After nearly a year of painful bureaucratic and Ministerial introspection into the Canadian federal state, a total of about $7 billion per year in departmental savings was yielded through ‘Program Review’, against a federal deficit of $38 billion, or about 7 per cent of GDP.

To be sure, ‘Program Review’ resulted in a litany of programme reductions and tens of thousands of fewer public servants, mostly through attrition and generous buy-out packages. A few departments were fundamentally changed, notably the industry and transport departments. But ‘Program Review’ did not live up to its lofty goal of re-defining the Canadian federal state or contributing massively to deficit elimination.

That effort was achieved on a parallel track, on a train driven by the department of finance and the prime minister’s office, with the Cabinet as the caboose. The deficit was eliminated largely outside the ‘Program Review’ process, principally through a re-structuring and deep cutting of Canada’s system of fiscal transfers from the federal government to the provinces, as well as a reduction in unemployment insurance benefits.

It didn’t hurt that at about this time – 1995-97 – the North American economy started firing on all cylinders after the brutal recession of the early 1990s. This produced a substantial revenue boost, enhanced by a new value added tax – which turned out to be a cash cow – that had been put in place a few years before by a previous government.

So by all means look at the Canadian “Star Chamber” experience as a model. But be under no illusions; when you are running a big structural deficit – as Canada was in the 1990s and as Britain is today – the road to serious deficit reduction is not via paring back programs and firing bureaucrats. The Canadian experience shows that a government needs to get much more creative and draconian than that – and the last time I checked the UK did not have anything near the level of intergovernmental transfers ripe for the cutting.

1. Juderobinson says:

   June 10, 2010 at 11:01 am

   RT @leftfootfwd: Reality check on star chambers and fiscal deficits: A view from Canada: http://bit.ly/cq0uVG
2. LockPickerNet says:

   June 10, 2010 at 11:56 am

   Reality check on star chambers and fiscal deficits: A view from Canada: http://bit.ly/cq0uVG via @leftfootfwd
3. Shamik Das says:

   June 10, 2010 at 11:58 am

   Former Canadian special adviser writes for @leftfootfwd: Reality check on star chambers and fiscal deficits: http://bit.ly/cq0uVG
4. Billy Blofeld says:

   June 10, 2010 at 12:13 pm

   “The Canadian experience shows that a government needs to get much more creative and draconian than that”

   It is really going to hurt us to fix Gordon’s crashed economy.
5. Mandy Meikle says:

   June 10, 2010 at 1:17 pm

   It’s not just “Gordon’s crashed economy” that’s going to hurt but the world’s crashed economy. I’ve only just found this site but have been speaking about peak oil and the energy crisis for 6 years now. Our economy only functions thanks to the surplus energy from oil. Peak oil is the point at which global production of conventional oil (i.e. the ‘cheap’ stuff) reaches a peak and then declines. Oil is not running out but it is going to get a whole lot more expensive and that means rising costs for power, food, transport, everything really.

   I’ve started a blog (http://mandymeikle.wordpress.com/) to try to get some debate going. We really have to start thinking how the future is going to look without abundant supplies of cheap energy.
6. Fat Bloke on Tour says:

   June 10, 2010 at 4:26 pm

   Billy Blowhard

   Nice try, I await you anti GB laundry list as supplied by the Forger’s Gazette with interest.

   Any chance you could up your game and develop your own thoughts on the matter?
7. Canada 2020 says:

   June 10, 2010 at 5:24 pm

   RT @canada2020's Eugene Lang in @leftfootfwd: Reality check on star chambers and fiscal deficits: A view from Canada http://bit.ly/c1jTma
8. Canada 2020 says:

   June 10, 2010 at 5:29 pm

   Our own Eugene Lang in @leftfootfwd: Reality check on star chambers and fiscal deficits: A view from Canada http://bit.ly/c1jTma #can2020
9. Fat Bloke on Tour says:

   June 10, 2010 at 5:55 pm

   EL

   I think you have to be very careful about generalising the concept of a structural deficit to the current situation in the UK.

   I feel that there has been a bit of shroud waving regarding the issue, the bigger issue to me is tax avoidance and the fact that the state seems always to be playing catch-up in determining the tax evasion / avoidance boundary as defined by our business friendly judiciary.

   We are currently looking at 36/37% in tax take and 47/48% in spending which compares to the position going in to the Credit Crunch of 39% tax take and 42% spending. We need to aim to get back to that situation in the medium term not slash and burn when there is great uncertainty and the growing possibility of a double dip.

   Regarding the specifics of the situation in 90’s Canada, what about the low C$ policy and the boom in the Ontario auto industry. Chrysler did their bit with the LH model which came out in 93 but all the plants blossomed in the years to 2000.

   Finally what was the position in the provinces?
   Did they not have issues dealing with reduced Federal monies?
   Also the quality of services was also under pressure even when the national government was running a surplus.

   Consequently I feel that the lesson from Canada is only being pushed by the right wing dog boiling establishment as a fig leaf to cover their own tax cutting agenda.

   They will cut spending when times are tough.
   They will cut taxes when times are good.
   They do not want to pay for the New Labour welfare state of 2008/09.
   I fear we will soon look back on that period as some sort of golden age.

   Unfortunately too few people realised what we had at the time.
10. Why the ConDem’s prefer Canada for Sweden… « My Political Ramblings says:

    June 11, 2010 at 2:06 pm

    [...] People cannot be fooled into thinking that the Canadian model is the only way, nor that it is the best way. 40,000 public sector job cuts, immediately, well that is just disastrous. Furthermore, the so-called ‘Star Chamber’ – well that has been criticised too(see Left Foot Forward for a really good article on this). [...]