Lessons from Canada in how to manage deficit reduction

By Bernard Simon in Toronto :: via the Financial Times

Published: June 8 2010 03:00 | Last updated: June 8 2010 03:00

Paul Martin has a word of advice for George Osborne as the chancellor starts taking aim at the UK’s towering budget deficit: keep your eye on the voters, not on the markets.

As Canada’s finance minister in the 1990s, Mr Martin spearheaded a deficitslaying strategy that is now widely seen as a model of how to restore fiscal discipline.

“The markets are not being cut, it’s the people who are being cut,” Mr Martin, now retired, told the Financial Times yesterday.

“If you prepare them well, people will understand. They will not stay with you unless they feel that the sacrifice you’re asking of them is going to succeed.”

Mr Martin became finance minister in 1993 after Canada’s Liberal party, led by Jean Chrétien, ousted the Conservatives in a general election. The federal deficit was running at over 8 per cent of gross domestic product while the national debt had climbed to 70 per cent of output. With 36 cents of every tax dollar earmarked for interest payments, members of parliament were under growing pressure to rein in the deficit.

Wide public consultation played a critical part in his ability to push through budget cuts, Mr Martin says. He spent most of 1994 criss-crossing the country, bringing business executives and administrators to meetings with union officials.

“Everybody would be there saying: ‘You’ve got to cut the other person’,” Mr Martin recalls.

Events beyond Canada’s borders helped. The Mexican debt crisis broke just two months before Mr Martin was due to deliver his belt-tightening budget in early 1995. Canadians were jolted by a much-quoted Wall Street Journal editorial that described the Canadian dollar as the northern peso.

“People were really quite scared that we were on the precipice of a crisis,” recalls Don Drummond, the finance department’s budget chief at the time and recently retired chief economist at Toronto-Dominion Bank.

“By 1995 the public was not only ready for it, but egging the government on,” Mr Drummond says.

Mr Martin decided on budget cuts by going through a list of government departments with Mr Drummond and David Dodge, the finance department’s top civil servant who went on to become governor of the Bank of Canada. The 1995 budget trimmed departmental operating budgets by about 5 per cent.

Cuts to grants and subsidies went far deeper. Some non-profit groups saw their budgets virtually wiped out.

“I would say: ‘Department of energy, how much can we cut and still maintain our priorities?’ They would say ’35 per cent’, so I would write down 35 per cent,” Mr Martin says.

“I was accused of being arbitrary and unreasonable. And I was. But if you spend five years doing this and engage in process, you’ll be nickelled and dimed to death.

“At the end of it, we still hadn’t met our target, so we sat down and we did it again.”

A cabinet committee that heard appeals from aggrieved ministers was told that any amounts reinstated for one department had to be clawed back elsewhere so that the bottom line remained the same.

The government retreated on only one front. A noisy protest by senior citizens on Parliament Hill forced it to back away from cuts to pensions.

Helped by low interest rates, a rebounding global economy and a falling Canadian dollar, Mr Martin balanced the books within three years. But the discipline did not last. The Liberal government and its Conservative successor, which took office in 2006, “saw unanticipated surpluses, and kept spending them”, Mr Drummond says.

Canada once again confronts a record deficit, though on a more modest scale than its G7 partners.

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