Canada's ex-finance chief gives UK budget tips

LONDON Mon Jun 7, 2010 10:51pm BST

Former Canadian Finance Minister Paul Martin takes the stage during a tribute in his honour at the Liberal convention in Montreal, November 30, 2006. REUTERS/Shaun Best

Former Canadian Finance Minister Paul Martin takes the stage during a tribute in his honour at the Liberal convention in Montreal, November 30, 2006.

Credit: Reuters/Shaun Best

LONDON (Reuters) - Britain is looking to Canada for tips on how to transform a massive budget deficit into a surplus at high speed.

Clue: Canada did it in four years in the late 1990s.

But if it wants to emulate Canadian success, the coalition government will have to be prepared to make severe cuts in areas like education and welfare and to be much more explicit about which jobs, benefits and services will go.

That's the message from Paul Martin, the former finance minister responsible for Canada's fiscal transformation.

"Cuts are not easy. They are not easy for politicians to advocate or for people to swallow," Martin told Reuters in a phone interview on Monday. "But there's one thing worse and that's leading people on."

In the mid-1990s, Canada faced a budget deficit of 9 percent -- the UK's is currently around 11 percent, one of the highest in the developed world -- thanks to spiralling public spending and soaring debts.

But a newly elected centre-left government pledged to turn that around. And turn it around they did.

Within five years, Canada was in surplus. The government had slashed spending, cut jobs and sliced out entire government programmes to eliminate debt -- and all with public buy-in.

Canadians say the lessons are simple but tough.

First, the government must prepare the public for the pain to come, and secure their support.

After huge international criticism of Canada's financial position in the early 1990s, which included the threat of an International Monetary Fund bailout, Canadians eventually came round to the idea that a period of austerity was necessary.

The government was also helped by high interest rates: The thought that Canada was spending one in every three tax dollars simply servicing debt helped to crystallise opinion.

Though Britain does not face high interest rates, it is clearly a message that Prime Minister David Cameron believes can chime with the public.

On Monday, he warned that if no action were taken to reduce a deficit that reached 156 billion pounds in the year to April, within five years, debt-servicing costs would be more than is spent on schools in England, climate change and transport combined.

NO TIME FOR BUY-IN?

Martin said he conducted a series of televised town hall style meetings across the country in the run-up to his first major budget, attended by representatives from big business, unions, and sectors like healthcare and education.

"(You) need to prepare your public and legitimately consult with them as to the trade-offs that have to be made," he said.

The public debate demonstrated that "nobody could be left untouched."

By the end of his year-long consultation, Martin said nobody was in doubt which areas would be hardest hit.

It is this public buy-in that, arguably, the coalition government still lacks after an election in which all parties warned about the scale of Britain's debts but gave almost no detail on the measures that would be needed to tackle them.

The government is expected to announce on Tuesday a public consultation, but it is doubtful whether it has the time or the money to hold an open national debate that will secure the national "all in it together" attitude it needs to push through radical reforms.

EVERYTHING IN SCOPE

And there can be no doubt that reforms will be radical.

The Institute of Economic Affairs, a free-market think tank, estimated this week that if the UK were to emulate Canada, it would have to cut 140 billion pounds from public spending.

That could entail a far smaller public sector, with the loss of thousands of jobs; loss of many welfare and benefit schemes, and deep cuts in areas like defence and education. No amount of paper clips or "efficiency savings" will do it.

"You can't do this partially and you can't do it with kid gloves," said Martin, who later became prime minister.

Rather than taking a one-size-fits-all approach that shared pain evenly between departments, as Britain has tended to do in the past, Martin and his deputy finance ministers assessed spending across government and prioritised it programme by programme -- a system the UK looks likely to copy.

This meant some areas were axed completely -- healthcare in particular suffered -- while others even saw investment increase as they were deemed a priority for government.

"The first question is not what do we have to cut, but what do we absolutely have to preserve," Martin said.

In the UK, healthcare and overseas aid have already been singled out for special protection, meaning that more drastic cuts will be necessary in other departments to achieve the necessary savings.

Finally, Martin said it was crucial to set targets for cuts and meet them:

"If you set out annual targets and if you achieve those annual targets on the way to deficit elimination, then (the public) will see this as a great national project."

(Reporting by Jodie Ginsberg; Editing by Jan Paschal)

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