When it comes to tackling the deficit be open, transparent, and whatever you do, don’t over promise!
Endeavour Public Affairs interview with the Rt. Hon Paul Martin, former Prime Minister and Finance Minister of Canada – Part One
Next Wednesday the Chancellor of the Exchequer, George Osborne MP will deliver his fourth Budget Statement to the House of Commons. Ahead of the Budget, Richard Hyslop, founder of Endeavour Public Affairs, spoke with Canada’s former Prime Minister and Finance Minister, Paul Martin. Part one of two of this interview looks at what lessons the UK could learn from Martin’s time in charge of the Canadian economy during which he erased Canada’s deficit, recorded five consecutive budget surpluses, paid down the national debt, and set Canada’s debt-to-GDP ratio on a downward track. In addition to this he introduced the largest tax cuts in Canadian history, the largest increases in federal government support for education and research and development, restored the Canada Pension Plan, and strengthened the regulations governing Canada’s financial institutions. Canada is now viewed as an international model for sound financial regulation.
The UK is now entering its third year of a deficit reduction plan. The Prime Minister and Chancellor have maintained a strong rhetoric on cuts. There are some ring-fenced budgets such as the Department for Health and the Department for International Development, and the Government has faced a number of protests from various organisations concerned about cuts in funding to their sector. Despite the tough rhetoric, overall government expenditure will be higher at the end of this parliament than at the start with Citi Bank predicting UK debt will peak at 110 per cent of GDP in 2016. With polls showing that just six per cent of the public realise that debt is rising, the Government’s strategy arguably works politically, if not economically. However, how does this strategy compare with the successful example of Canada?
Setting the scene, Martin explains the situation he faced in 1993, “When I took office, Canada had, with the exception of Italy, the worst deficit and debt ratios of any country in the G7. The Wall Street Journal had gone as far as calling Canada a Third World country.” Canada had seen its balance sheet deteriorate over a 20 year period and as Martin put it, “The issue at hand was when is someone going to deal with this?” But as Martin explains, “You have to distinguish between a widely held perception among the public that somebody has to deal with the difficult balance sheet, and the sacrifices required to get there. Let’s be honest; cuts in government expenditures hurt people. Therefore, deficit elimination must be seen as essential to their wellbeing in their daily lives and it must be explained that it requires a national effort.”
In this situation, how do you take the people with you? Martin argues that there is only one thing you can do and that is to look the people in the eye and tell them the truth. “I’ll tell you what we did in Canada. It took about a year and a half and it involved us going across the country holding meetings in town halls, church basements, and nationally televised round tables, talking about the tough choices that had to be made and making it clear that there would be no exceptions. You couldn’t talk about your neighbour making sacrifices; you had to be prepared to make the sacrifices yourself. That year and a half was crucial to getting the Canadian people behind us. When we did act in 1995, we did as exactly as we had promised but we had prepared the Canadian people for the action that we took.”
Martin is reluctant to be drawn into the UK debate, “I’m not going to comment on the UK directly, you will have to draw your own conclusions from what I say. When we took office there was a feeling in the country that we had to deal with the deficit and with the debt. It is one thing however for a population to believe it has to deal with something and it is another thing for a population to accept the decisions that were necessary. It was vital during the national debate that we engaged all elements of Canadian society: business leaders, unions and that they all be around the same table in order for Canadians to understand that there were no easy answers.” Martin explained that his biggest fear at this time was that a financial crisis would occur that would drive up Canadian interest rates. Two months before he presented his final budget a crisis did occur – the Mexican Peso crisis and Canadian interest rates did rise. However the results of the crisis were mitigated significantly by the severe actions taken in the 1995 budget. As Martin says, “If we had not taken the action when we did, when the Asian Financial crisis occurred two years later in 97/98 Canada would have been in a similar situation to that of some Continental European economies in 2008.”
Getting voters to not only accept that debt and deficit have to be dealt with, but also to accept the necessary measures in order to achieve this is a key factor in any economic recovery. What is also vital is ensuring that voters are not being asked to make these sacrifices in a futile effort. As Martin points out, “We knew we would be wrong in our projections (about the Canadian economy) because by definition all projections are wrong.” However unlike the UK’s Office for Budget Responsibility which has repeatedly overestimated economic growth, Martin’s projections were as he put it, “wrong in the right way.” He explains, “If a government promises its people that the deficit will be cut by a certain amount by a certain time, and the Government falls short of the mark then that becomes the breeding ground of doubt, of dashed hopes and expectations. A government’s best opportunity at deficit reduction comes in its first attempt. If it has to go back to the “well” a second, even worse a third time, not only public scepticism, but public despair will take over, futility begins to build and that’s of course what’s happened in Italy and Spain.”
Martin also argues that it is important to remain focused and not to be blown off course, “Let me tell you, if you have a serious deficit that must be the national priority. Solving a deficit is not the time to have an argument over big government or small government as they are doing in the United States. It’s not the time to have a huge debate about political science and philosophy. If you have a serious deficit you must have one objective and that is to eliminate that deficit or reduce it to acceptable levels. That is the message we took to the Canadian people and that has to be the driving goal of government otherwise you’re not going to succeed.”
When it comes to public expenditure, Martin says, “With the exception of Aboriginal Canadians who have essentially the highest levels of poverty in the country, we cut spending across the board. However, we did not cut across the board by an equal percentage, we prioritised. For example, we cut subsidies to industry by 60 per cent and other areas by 10 per cent.” Martin continues, “Now, because we acted when the global economy was in reasonably good shape we were able to take the very tough actions and reduce our deficit. On the one hand, when growth is tenuous at best, spending cuts have the potential to actually worsen the deficit. People sometimes confuse cuts in spending with deficit cutting, but the fact is they are not necessarily synonymous. On the other hand, when an economy is experiencing growth cuts in spending may reduce your growth but it will not worsen the deficit. It is therefore important to calibrate spending cuts or tax increases against the state of the economy. It would be foolish to impose a level of austerity that’s going to plunge the country further into deficit.”
Regarding tax cuts, Martin’s message is the same. Although he introduced the largest tax cuts in Canadian history, this was done after the deficit was eliminated. “The judgment call you have to make on taxes is simple. If the Government is short of revenues and cutting taxes is going to cut that revenue stream even further, then it is not wise to cut taxes. If you believe that cutting taxes in a certain area will in fact increase growth and increase the Government’s revenue, then by all means do it. However, it’s an important judgment call that must be made with the national goal in mind: simply put, will this help to eliminate that deficit or reduce it to a level that is acceptable?” Martin considers that this point is missing in the economic debate in the United States at present. “Essentially the United States is engaged in an argument about winners and losers. Let me tell you, you cannot have a minority of winners when most of the country is losing, and expect to succeed.”
In 2015 the UK electorate will go to the polls to elect their government by which time it is predicted that national debt will be over £1 trillion. At this point does it simply become impossible to turn the situation around because the electorate will not vote for parties proposing the tough action required to eliminate a debt of this scale? We have already seen the electoral success of anti-austerity parties in Southern Europe; could the same happen in the UK? Returning to his key message, Martin states that it is necessary to be open and honest with the people. “Politicians are capable of overcoming the short term electoral needs and pressures, but they are only able to do that if they are open with their people. If you explain to them what the situation is and that the actions you are taking are such that their children will not have to pay burdensome taxes, and so that they will have access to the same services that their parents have had, then you can overcome the electoral cycle because the people will understand your motivation.” Martin cites the example of the Canada Pension Plan, which had an unfunded liability greater that the national debt at the time he acted. “Now it is the most accurately sound pension plan in the world. In order to achieve this we obviously had to make some cuts to the plan and increase premiums. None of the people voting for us would benefit from these sacrifices, but their children would and they voted for us because they recognised this fact.”
Turning to the situation in the United Kingdom Martin concludes, “You are not going to deal with the level of debt that you have in the UK in a five year period, you are going to do it over a much longer period and your politicians will have to deal with this. In Canada we imposed much deeper austerity than most because we knew that as long as the economy was strong we could deal with this thing in a relatively short period of time and we eliminated our deficit in four years. The UK is facing a weak global economy and the only thing you can do is lay out a longer term plan and take that to your people. You have to rely on the democratic system working meaning that the politicians will bring their populations with them through being open and transparent about the real sacrifices that have to be made. The main thing is not to over promise.”
The Right Honourable Paul Martin was the twenty-first Prime Minister of Canada from 2003 – 2006, Minister of Finance from 1993 to 2002, and he served as the Member of Parliament for LaSalle- Émard in Montréal, Québec from 1988 to 2008.
Published: Thursday 14 March 2013
© Copyright of Endeavour Public Affairs 2013.
Photograph: © Copyright of The Right Honourable Paul Martin.