British Prime Minister David Cameron (CARL COURT)

Economy

Canada the teacher as U.K. prepares for budget blitzkrieg

Rome — The Globe and Mail

Declaring that Britain's finances are in dire shape, Prime Minister David Cameron is preparing Britons for a Canadian-style attack on the deficit before rising interest payments crowd out social programs or turn the country into another Greece.

The Canadian-inspired plan came after George Osborne, Britain's Chancellor of the Exchequer, met Finance Minister Jim Flaherty in South Korea during Group of 20 talks on the weekend. In a Bloomberg TV interview, Mr. Osborne said: "If you look at countries that have successfully done this, like Canada in the 1990s, their whole approach was to take a much more fundamental view of government expenditure than a pro-rata cutting exercise."

Details of Britain's top-to-bottom spending review and clampdown may not be known until the new coalition government unveils an emergency budget on June 22, but are expected to include a variation on the "star chamber" system, also inspired by Canada, in which cabinet ministers will be forced to justify their budgets in front a panel of senior civil servants and ministers.

In a speech Monday at Open University in Milton-Keynes, England, Mr. Cameron said: "The overall scale of the problem is even worse than we thought. How we deal with these things will affect our economy, our society, indeed our whole way of life."

Britain is expected to have a budget deficit equivalent to 11 per cent of gross domestic product this year, according to Deutsche Bank's economists. That's the worst among the Group of Seven industrialized countries and nearly as bad as Greece's, which came close to a debt default about a month ago.

Spendthrift Europe

Mr. Cameron said unchecked government spending would result in annual interest payments of £70-billion ($107-billion) a year on the national debt, up from the current £42-billion. "But £70-billion means spending more on debt interest than we currently do on running schools in England, plus on combatting climate change, plus all that we spend on transport," he said.

He said ignoring the ballooning deficit is unthinkable. "Greece stands as a warning of what happens to countries that lose their credibility," he said.

The Conservative-Liberal Democrat government announced spending cuts of £6.2-billion shortly after it was elected a month ago. Since then, it has warned that far deeper reductions are to come as debt-choked governments across Europe roll out austerity programs to rein in outsized budget deficits, slow the euro's deterioration and prevent sovereign bond yields from soaring.

On Monday, Germany presented plans to reduce public spending by at least €80-billion ($101-billion) over four years, the deepest cuts since the Second World War. No fewer than 15,000 state jobs are to be eliminated. "The last few months have shown, together with Greece and other euro states, how important it is to have solid finances," German Chancellor Angela Merkel said at a press conference Monday.

While the new British government received advice from Mr. Flaherty, it was Paul Martin, the Liberal government's finance minister between 1993 and 2002, who is credited with setting the model deficit-elimination effort in the mid-1990s. In an interview Monday, he said he is not formally advising governments on how to cut their deficits without triggering social turmoil, but he admitted that he has had "numerous discussions with various European governments, all informally, and I have certainly talked to people in the U.K."

In 1993, Canada's budget deficit and debt-to-GDP ratios were the second worst among the G7 countries, after Italy's, and the U.S. financial press was unfavourably comparing Canada to Mexico. In 1995, Mr. Martin set out a goal to halve the deficit to 3 per cent by 1998, with an unannounced goal of a zero deficit by 2000. By 1998, the deficit was eliminated and overall debt was dropping quickly, allowing Canada to get through the Asian crisis with little damage and go on to become one of the strongest Western economies.

While Mr. Martin said there is no "cookie-cutter" approach to deficit reduction, he stressed that any government that embarks on an aggressive fiscal repair job must make its goals and timelines absolutely clear, make sure it meets those goals and ensure the pain is evenly spread.

Above all, he said, the effort must be sold to the public as a sacrifice that will eventually produce positive results, such as freeing up funds for education that would otherwise have gone to debt payments.

"It's all about confidence," he said. "As long as your plan has credibility and there is an end to it, and you achieve your targets, it can work."

Mr. Martin introduced the program spending review that would later become known as the star chamber process. The process gave ministers the right to appeal the budget cuts imposed on their departments on the condition that any extra spending in one department was made up by less spending in another. "Individual departmental targets were appealable, but the government's bottom line was not," he said.

In recent days, British newspapers and TV programs have examined the Canadian example. Not all have been complimentary. Some have noted that generally rising markets in the last half of the 1990s made the deficit reduction easier. The Daily Telegraph said the cuts damaged provinces: "As provincial governments saw their health grants slashed, thousands of nurses were sacked and hospital waiting times soared."