George Osborne, British chancellor of the exchequer, calls 1990s Canada a “striking example” of cuts leading back to prosperity and recently sought the advice of Mr. Martin. The British Government has even gone so far as to establish a Canadian-style “cuts committee” in which cabinet ministers must justify every dollar of expenditure to a panel of their colleagues.
One should be careful, however, not to straightforwardly apply Canada’s experiences in the 1990s to the current economic situation of other developed nations. The Canadian experience of the 1990s is very different from the present environment of other advanced economies.
Even after Canada cut spending, for example, its government still spent more as a share of GDP than the United States and the United Kingdom . Further, closer examination shows that Canada’s economic growth was not actually due to spending cuts. Growth was instead bolstered by the bustling business activity of Canadian exporters, which occurred for several reasons.
This is not to suggest that the Liberals do not deserve credit for their handling of the economy. It is simply to say that spending cuts were not the prime mover of Canada’s success and that countries looking for the keys to turning their economies around should not misinterpret Canada’s experience. In the 1990s many countries employed a broad range of fiscal policies and experienced economic growth as much of the global economy—driven by many factors—prospered. It’s mistaken to single out one country with one fiscal policy as the model for the current situation.
The larger point is that austerity measures during economically unstable periods do not produce economic growth. This point is important because developed countries such as the United States are currently plagued by large gaps in aggregate demand and are looking for ways to rejuvenate their economies. Private firms are unwilling to hire and invest the surpluses of cash they have on their balance sheets. Households are reluctant to consume and unemployment remains at historically high levels. During such times, public spending that temporarily compensates for the reduction in private spending is good policy that helps stabilize the economy.
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. Statistics from OECD Stats Extracts.