Monday, June 14, 2010

Countries that we are not like No 2 - Canada

Liam Byrne appears to be writing a series of pieces explaining why we are not like other countries. This week, as the Westminster village gossip moves on from explaining why we face a Greece-like situation (we don't), it starts to explain how the British government should choose a Canada-like solution (they shouldn't). Read Liam's take on it here.

The short version is that in the mid 90s, the Canadian government executed a sharp about-turn in government spending and removed a deficit of £42 million in just four years. They did this by slashing the size of the government workforce by 20% - some 55,000 people, which would equate to Clegg/Cameron pushing some 1.5 million people onto the dole in the UK, a situation that might prove a little problematic for them.

What Cameron/Clegg fail to point out is that while the Canadian economy was being realigned, the private sector was able to make the most of a global economic boom, improved access to wealthy US markets through the new NAFTA agreement and strict control on interest rates. Our interest rates are still low and we don't have the opportunity to fill demand caused by global growth, because everyone is in the same boat. There seems to be a myth gaining traction within the Liberal/Conservative government that the private sector is being held back by government spending, rather ignoring the fact that the private sector is struggling along and is entirely unable to absorb the people who are facing ejection from the state sector.

The role of the state right now - a position maintained by the Labour Party and supported until the election by the Liberal Democrats - is to sustain the country through this tough period to allow a private sector recovery that will create new jobs for former state employees. It isn't happening. David Blanchflower was right last September when he intoned in suitable doom-laden words

The time for cutting public spending is not now, not next year and not the year after… Unemployment is going to continue to rise this year and may keep on rising … If spending cuts are made too early and the monetary and fiscal stimuli are withdrawn, unemployment could easily reach four million If large numbers of public sector workers, perhaps as many as a million, are made redundant and there are substantial cuts in public spending in 2010, as proposed by some in the Conservative Party, five million unemployed or more is not inconceivable. They could be our lost generation … It is not hard to work out that, with unemployment rising fast, it isn’t the right time to cut public sector jobs, wages or public spending for that matter.

Mr Osborne, I really don’t know which economists are advising you on this brilliant strategy to increase unemployment, but feel free to give me a call. We must not repeat the mistakes of the 1930s by assuming a recovery is taking place and then cutting spending and raising interest rates too early. Such action could push the economy into a decade-long depression.


As both Liam and Mehdi Hasan point out, the removal of that deficit caused great pain in Canada, but it also reversed performance on inequality and poverty (something that Boy George Osborne criticised Labour over), such that the OECD reported in 2008 that
After 20 years of continuous decline, both inequality and poverty rates have increased rapidly in the past ten years, now reaching levels above the OECD average.

Yet again, this is one area where I want to be proved wrong. I'd love to see 'progressive cuts' - whatever they are - that strip the fat and waste from the government bones without affecting frontline services. I just don't believe that they are possible. I'd love to see a private sector taking up the slack from government, but I can't see where these employees would go. I'd love to believe that taking a massive slice of money out of the economy will create a vacuum into which private sector growth could explode, but I don't have sufficiently powerful hallucinogenic drugs to hand.

The Liberal Democrats and the Tories are trying to scare you over the deficit. It is a problem, but it isn't the most pressing one. They want to cut the government not because it will help the economy, but because a smaller government is an ideological imperative for them and the parlous state of the economy is an ideal excuse to wield a big and bloody axe.

You should be scared, but not of what might happen if they don't cut, but of what will happen if they do.

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