A cut above

When Gordon Brown finally uttered the word “cuts” – a totemic term he had until then avoided – at the TUC conference last year, he was only confirming what everyone already knew: that public spending will inevitably have to fall in the medium term to counteract the UK’s spiralling public deficit. More recently, the chancellor attracted almost as much attention when he said that in the years ahead budget cuts would need to be “tougher and deeper” than during the Thatcher government.

The Conservatives have pressed Labour on the need to slash spending sooner, but for all the rhetoric over cuts, neither main party has spelled out a systematic approach to reducing programme spending across departments – a point made forcibly by the Institute for Fiscal Studies last week. Certainly, none of them have raised ideas that reflect the examples of successful fiscal contraction that have been seen in other parts of the world. So, when the election and the phoney rhetorical war is over, what lessons can the UK government learn from the experiences of other countries?

That politicians of all hues are wary of setting out the detail of proposed cuts ahead of an election – beyond politically uncontroversial efficiency savings – is no surprise, and in the examples of Sweden, Ireland and Canada examined here, leaders did not undertake the stringent measures until winning significant mandates from their electorates.

On the basis of these case studies, it’s important once in government to capitalise quickly on the political momentum: deep spending cuts – and tax rises, if used – are unlikely to grow in popularity with the media, public sector workforce or voters at large as the honeymoon period comes to an end. In a presentation to the Institute for Government (IfG) – which has run a series of seminars on this subject – former Swedish finance and prime minister Goran Persson warned attendees: “You have two years. If you are not in command of the process then, you will lose momentum and soon face the next election – where you will be replaced.”

Getting the necessary momentum is helped if – as with the Irish government in 1987 – governments secure a degree of consensus across the political divide. Charles Haughey’s Fianna Fail administration was certainly helped in its aggressive spending cuts by a pliant opposition. “If [the government] is going in the right direction,” the then-leader of the Irish opposition said, “I do not believe that it should be deviated from its course, or tripped up on macro-economic issues.”

Julian McCrae, an IfG fellow who has written a ‘guide to action’ on fiscal consolidation, says the more consensual styles of public debate in Ireland and Sweden almost certainly helped smooth the process. “The more the UK can move towards that sort of approach, the more likely we are to succeed,” McCrae says.

However, Britain’s notoriously confrontational political culture may preclude any such moves towards consensus. And McCrae points out that in more than one successful deficit reduction plan, public and political consensus was promoted by the long-term nature of the fiscal problems. Both Ireland and Canada had suffered decades-long deficits and failed in previous attempts at reduction. “The history prior to [successful fiscal consolidation] for both countries was a pretty chronic problem with their public finances for at least a decade,” McCrae explains. “You’ve got this built-up sense of ‘something must be done’, which generates quite a lot of consensus.”

With or without consensus, what are the most effective mechanisms for deciding upon and achieving real cuts in departmental programme spending, and how can the responsible officials be trusted to deliver? In the Irish example, empowering one senior figure helped: the-then head of the Department of Finance (equivalent to the Treasury permanent secretary) was given responsibility for chairing the committee that recommended the size and location of spending cuts. Canada employed a much more developed approach to senior officials, who were required to sift through their budgets to find areas of spending which could no longer be justified. Up to 30 per cent of their salary was awarded on the basis of their finding the requisite savings, and if they couldn’t find the necessary cuts, they faced even greater budget reductions imposed from above.

Jocelyne Bourgon, then Canada’s most senior civil servant, helped oversee the so-called ‘programme review’ process. As well as holding officials closely to account for their departments’ savings, the process attempted a built-in safeguard against manoeuvring. “Nothing was agreed until everything was agreed”, Bourgon explained in a briefing on the programme, “which deflected tactical behaviour by those who hoped they could be exempted and, at the same time, protected those who came forward early with ambitious proposals.” Any Whitehall officials who thinks the hair-shirted Canadian model too radical for Whitehall should note that the IfG seminar Bourgon addressed was chaired by none other than Sir Gus O’Donnell.

Politicians dread talking about cuts in public spending, but announcing tax rises is hardly more popular – and economists disagree over the effectiveness of widespread tax rises in reducing deficits. A report from Andrew Lilico, chief economist at centre-right think-tank Policy Exchange, examined a series of international and historical examples of deficit reduction and found an average 80:20 breakdown of spending cuts versus tax rises.

Lilico argues that, because tax rises can strangle economic growth, deficit reductions based primarily on spending cuts are more likely to stimulate sustainable recoveries. However, those in favour of a relative increase in the tax burden are likely to point to the sustained fiscal recovery of Sweden, where tax rises made up nearly half of the successful rebalancing. The balance employed in the UK is yet to be determined, and will be decided by the result of the general election: Labour promises a 2:1 ratio of spending cuts to tax rises, with the Lib Dems offering 2.5:1 and the Conservatives 4:1.

Divining too much from what Lilico calls the “idiosyncratic features” of different countries’ experiences in deficit reduction is clearly a dangerous game. But as experienced former-permanent secretary Sir Brian Bender told CSW earlier in the year, the lack of “institutional memory” of spending cuts in Whitehall should make such examples even more valuable to UK officials. If civil servants feel too despondent about the fiscal future, they should be thankful that the tightening is likely to fall short of that experienced in the early 1920s – when civil service numbers were cut by a full 35 per cent.

Sweden

The background
Between 1990 and 1993, Sweden’s GDP fell by six per cent, and the country’s budget deficit rose to 11 per cent of GDP – the highest among the developed countries belonging to the OECD. This was all the more startling given that during the 1980s, the country had regularly enjoyed budget surpluses. Unemployment reached 12 per cent, and in November 1992 – just two months after Britain had been forced into a similar position – the weakness of the currency forced the government to leave the European Exchange Rate Mechanism. By 1996, Sweden’s total debt as a percentage of GDP reached an eye-watering 84.4 per cent – but a fiscal consolidation plan had already been in place for two years.

The plan
An initial package of cuts had already been agreed between the centre-right government and the main opposition party, the Social Democrats, but when the latter decisively won the 1994 election it embarked on a still more sustained and ambitious programme to repair the public finances. “We had a debt that had doubled over a few years. It is easy to double a debt but extremely painful to halve it again,” said former Swedish prime minister Hans Göran Persson at a special seminar for the Institute for Government last year.

Before assuming the top job, Persson was Swedish finance minister for the first two years of that administration, with the thorny task of overseeing a plan of complementary tax rises and spending cuts. His party’s social democratic ethos – and the Swedish tradition of high state spending – influenced the decision to make the deficit rely on a relatively high proportion of tax rises against spending cuts. What’s more, departmental budgets were cut evenly, with no areas of spending ring-fenced. The percentage ratio of spending cuts to tax rises was 55 to 45 during the period, with tax revenues as a proportion of GDP rising by seven per cent and spending falling by nearly eight per cent.

The effect
By 1998, Sweden had returned to budget surplus and its public debt was virtually halved between 1996 and 2008. Having survived the severe consolidation, Persson was rewarded with what he called a “beautiful” election victory in 2002.

Ireland

The background
By the late ’80s the Republic of Ireland had struggled economically for at least a decade, with relatively high state spending – disproportionately funded by debt – plus low growth and high unemployment made worse by the perennial problem of mass emigration. By 1986, the budget deficit represented around 14 per cent of GDP. An attempt at fiscal tightening between 1982 and 1984 had failed, but in 1987 the main opposition party, Fine Gael, committed to a strategy of supporting the government in key decisions on deficit reduction. “Even the man in the street was asking the politicians whether the IMF would have to take over the running of the economy,” said then-finance minister Ray McSharry.

The plan
Taoiseach (prime minister) Charles Haughey commissioned a special three-man Expenditure Review Committee – colloquially known as ‘An Bord Snip’ – consisting of two senior officials and an academic, charged with recommending options for expenditure cuts. They called for swingeing cuts in overall spending, wages and pay in the public sector. Between 1986 and 1989, public sector employment dropped by 10 per cent and total spending fell by around the same percentage of GDP.

In the Irish example, spending cuts dominated over tax rises. As well as broad political consensus, the stringent measures on public sector employment were achieved through a distinctly corporatist approach to industrial negotiations. Ireland developed a tripartite model of three-yearly negotiations between government, employers’ groups and unions, known as ‘social partnership’. The first such arrangement was 1987’s ‘Programme for National Recovery’.

The effect
The deficit was reduced to two per cent of GDP by 1989, and the fiscal tightening – along with low corporate tax rates and industrial stability – is widely thought to have helped stimulate the long ‘Celtic Tiger’ boom that the Republic of Ireland subsequently enjoyed in the 1990s. After the financial crisis of 2008-09, the ‘Bord Snip’ model was resurrected to recommend another aggressive round of cuts, including culling public sector pay and numbers, and a five per cent cut in welfare spending.

Canada

The background
By the early 1990s, Canada’s budget deficit had reached nine per cent of GDP, and in 1994 its debt represented nearly 70 per cent of GDP. Successive governments had struggled with fiscal problems and made unsuccessful attempts at consolidation. In 1993, a federal election saw the centre-left Liberal Party gain power, with a strong majority under the premiership of Jean Chrétien.

The plan
New finance minister Marcel Massé implemented a system known as ‘Programme Review’, which endeavoured to apply a set of objective criteria to all areas of government spending, with nothing ring-fenced. The review was chaired by then-Clerk of the Queen’s Privy Council (the Canadian equivalent of the cabinet secretary) Jocelyne Bourgon, and involved departmental heads. The officials’ recommendations were approved by Massé and then the entire cabinet.

Uniquely, senior officials were incentivised to find cuts through a system of appraisal and performance-related pay. Public sector employment was reduced by 19 per cent over five years. Central government spending was cut by 20 per cent during the Programme Review period. “There was blood on the floor everywhere,” Massé said of the period. “But at least everyone could see that others were hurting too.”

The effect
The Canadian budget deficit had turned into a surplus by 1998 – the first in 28 years – and the country’s publicly-held debt fell steadily, to beneath 30 per cent of GDP by 2007. It remains the lowest such proportion in the G8.