Think tank: a model of brutality britain can build on

On May 12, the two key architects of Canada’s fiscal reforms of the 1990s are coming to London. Senior politicians and top civil servants are keen to meet them. For good reason.

By the early 1990s Canada was running a budget deficit of 9.1% of GDP – virtually identical to that announced in the UK’s budget. Canada’s public debt was 70% of GDP and rising; its currency was weak and it faced the real prospect of being crippled by debt if investors lost further confidence. The fascinating sequel is how Canada turned itself around.

First, here’s what didn’t work. Between 1984 and 1993, the Canadian government implemented no fewer than 15 initiatives to control or reduce expenditure. During this time accumulated debt tripled. The hard lesson seems to be that “efficiency gains” just don’t deliver what’s needed.

But in 1994 the recently elected Chrétien government tore up the textbook and introduced a totally different approach. The result? Canada’s eyewatering budget deficit was cut to zero within three years and public debt was cut by a third in five years. Central government departmental budgets were reduced on average by 20% within four years. Canada’s top civil servant and one of the visitors to London, Jocelyne Bourgon, said at the time, “an exceptional story about reinventing the role of government is being written in Canada”.

Three factors explain the Canadian turnaround. None makes particularly comfortable reading for British politicians. First, a collapse in the Mexican currency brought unwelcome attention to the weakness of the Canadian dollar and the sustainability of its debt. This moved cutting the deficit from an aspiration into an urgent necessity. Speculation against sterling and a spiralling of the cost of borrowing could easily do the same to the UK.

Second, the Canadians ran a brutal process called Program Review to identify “what needs to be done by government and what we can afford to do”, as Marcel Massé, the then cabinet office minister, put it. Spending that could be delivered in some other way, or that was not essential for government to do, was cut. Third, the prime minister, treasury and cabinet office ministers spoke with one voice.

In practical terms, Program Review required government departments to identify a long list of programmes and activities as prime targets for cuts or transfer out of central government. A committee of permanent secretaries chaired by Bourgon reviewed submissions and coordinated the process. Next, a group of ministers chaired by Massé reviewed the recommendations and final proposals were endorsed by the prime minister and cabinet.

Cuts were not evenly spread. Transport subsidies, international aid and agricultural subsidies were cut especially hard, but this allowed other kinds of spending to be protected or even increased. For example, benefits for the elderly were increased by more than 15%.

One of the fears in the current context is that cuts risk deepening the recession and slowing growth in the years to come. On this, the Canadian evidence offers some comfort. In the period 1995 to 2000, immediately after Program Review, the Canadian economy grew at just under 4% per year – significantly above the Organisation for Economic Cooperation and Development average of 3.2% and above that of both the US and Britain over the same period. This doesn’t prove that Canada wouldn’t have grown without the review, but it does suggest that public expenditure can be contained without dragging down the economy.

On the downside, while the review did deliver, there was criticism that it was ultimately “unscientific” in what was cut and driven by urgency rather than careful analysis. There were also political costs, with MPs – and two cabinet ministers – subsequently losing their seats in constituencies where the cuts fell hardest. Yet, overall, the gamble paid off – Chrétien was later returned to office with a clear, though reduced, majority.

In advance of the private seminar to be held at the new Institute for Government in London, Bourgon commented that “although the Program Review was exactly what Canada had to do at that time, I would recommend another approach today”.

She feels that the real challenge – and opportunity – is to turn the exercise into “a process of modernisation of public institutions including the role of the centre of government, the role of departments and rethinking of the relationship with citizens”.

Massé, the other Canadian visitor, may offer a tougher assessment. Speaking before the start of the Program Review process, he said “over time, governments collectively have promised more than they could deliver and delivered more than they could afford”.

Some may feel the same is now true of the UK.

David Halpern is director of research at the Institute for Government.

Jerrett Myers is a senior researcher there

Read the article in The Sunday Times here