Does Canada's former prime minister hold the key to reducing Britain's budget deficit?
Leading Conservatives are looking across the Atlantic – beguiled, it seems, by Paul Martin's no-nonsense approach to balancing a nation's books
Peter Hetherington | The Guardian | January 13, 2010
Paul Martin, the former prime minister of Canada, is clearly embarrassed by any suggestion that his brand of fiscal conservatism has become a model for David Cameron as the Tories covertly address multibillion-pound spending cuts in anticipation of power.
But whether he likes it or not, Martin, a tough – some say ruthless – finance minister before he became prime minister from 2004-06, is seen as a trailblazer of the right for the way he eliminated a crippling C$42bn (£22bn) budget deficit in just four years. And for Canada, read the UK, with its £170bn-plus deficit.
Just as New Labour gleaned valuable lessons from Bill Clinton's slick US presidential campaigns in the 1990s, so leading Conservatives are looking across the Atlantic – beguiled, it seems, by Martin's no-nonsense approach to balancing a nation's books, whatever the initial social costs in civil service redundancies and deep cuts to welfare and healthcare programmes.
Yet Martin, now 71, seems genuinely surprised by the interest from the Tories. He dismisses talk of being a "messiah of the right", saying: "I would contest that." And he insists that he has had no contact with British Conservatives. "I have never met them," he emphasises. "No, I have not."
In truth, Martin, who is the keynote speaker at the Guardian's Public Services Summit next month, seems ideologically on a different wavelength from many British Conservatives. He is fiscally conservative, certainly, yet far more socially liberal, and economically innovative, than many Tories. He says he is the equivalent of a mainstream Democrat in the US.
Martin still bridles at any mention of the recent neocon rampage not far across the US border from his Montreal home. He insists that withdrawing to small government, driving public services permanently to the "lowest common denominator", is the antithesis of a modern market economy. "No modern country can compete in a long period of time without education and basic research," he snaps. "The idea that you can wipe that out and let laissez-faire rule is not on."
But he maintains: "I am tough in fiscal matters. I do not think any country should put itself in the hands of bankers."
That is why, as minister of finance from 1993 to 2002, he introduced a system of strong bank regulation that became a model for other countries, if not the UK.
So what lessons can we learn from him? "I am not going to tell you Brits what to do," he says. "The two countries are very different. You had a financial crisis and a recession, and let us hope you are putting that behind you. Today, Great Britain is in a very tough situation, but America and other countries are as well." Though not, it seems, Canada.
British Conservatives, nevertheless, seem obsessed with the financial "magic" of Martin because he introduced the biggest reduction in government spending in Canada's history when the centrist Liberals swept to power in 1993. Martin was heralded as a "maple leaf miracle", although detractors say the reduction of Canada's deficit to zero by 1998 was not totally due to big public spending cuts. Federal spending went down by C$14bn (£8.46bn), but tax revenues shot up by C$32bn. In addition, because Canada devolves funding and responsibility for health, welfare and education to its 10 provinces, local politicians sometimes took the flak for cuts, rather than the party in power.
There is a certain irony here. Martin's father, Paul senior, a long-standing MP, introduced Canada's universal healthcare system when he was federal minister of health in the 1950s, against "massive opposition" from vested interests in the medical profession and insurance industry.
But Martin, now out of parliament and extremely active in third sector and charitable work, domestically and in Africa, insists that he had to act boldly as finance minister in the early 1990s because of fears that, following a financial crisis in Mexico, Canada – with its long-standing high budget deficit – would be similarly punished by the international investors who were financing its debt. "We were virtually a third world country," he maintains. "No one in the G7 was in as bad a shape as us, apart from Italy."
When asked about his model for public services, he ponders deeply. "We cut very deeply and sharply. I am convinced it was right. We did not cut public services with any joy and with a view that it would be a permanent state of affairs. We cut them quickly and sharply to reverse to growth quickly, which is what we did. We were worried about a recession. In your case, you are not isolated. Markets are not going to turn against you, [but] you must have got a firm target for deficit reduction that you are going to hit, come what may."
Those immediate cuts in Canada involved 50,000 civil service and public sector job losses, coupled with slashing the federal budget by 19% – in the interest, Martin insists, of creating stable finances so that public services could grow again. And, he stresses, they have done.
So what of the third sector?
While some on the right see social enterprise – a "third way" – as the answer to filling the gap left by government spending curbs, Martin urges caution. "There may be a role for these enterprises, but you are not going to replace the entire education system with social enterprise. Yet I do believe it has unparalleled potential."
He likes our co-operative movement – "Does a tremendous job," he says – and notes that the best banks in his home province of Quebec are run as co-operatives. But social enterprise, he says, is different, and he thinks governments generally are missing a trick or two. Why, for instance, can social entrepreneurs not benefit from the same tax breaks, overall support and legal status as the private sector? If they did, he says, plenty of opportunities would soon arise in some of the most challenging areas.
"Let me ask you a question," he continues. "You and I are sitting round a table and I say that I've got this great idea – let's say it's for an automated grocery store. Where would you go to raise finance?"
"The City, banks, venture capitalists – the usual sources," I suggest.
"Right," Martin says. "So then I say I've got another great idea, for getting street kids into work. They're going to learn a trade, and the enterprise will eventually make a good return."
Where to go for finance? Martin has a simple answer: the capital markets. "They have more money than charitable foundations and governments combined – and, yes, you sure do have 'angel investors' out there prepared to put money in."
But won't they will still need incentives? His answer is to offer tax breaks so that potential social enterprises are more attractive to investors. "And, guess what, in my experience, if you provide those tax breaks the investment will come, [but] you might have a bit more work in convincing the UK [government]."
But while the culture in North America is more amenable to tax breaks, in centralised Britain the fiscal mindset in the Treasury, and a conservative banking system, is more rigid. That's certainly a challenge, Martin admits. "The biggest problem," he says, "is convincing governments that social entrepreneurs can innovate and be a major factor in the provision of social 'goods'. Ministries of finance, especially in times of crisis, will be very cautious of tax breaks, because they will see them as tax leakage. So there is a big job in changing a mindset. But where you are way ahead [in the UK] is building the structures for social enterprise. You are way ahead of governments. You are clearly number one."
Returning to the subject of deficit reduction, on one thing he is firm: "When a government decides it has to deal with a deficit, it has to be its priority, not wishy-washy. Do it. Be open and transparent. My motivation was not to have a pretty balance sheet, but to preserve social programmes." And, Martin insists, he did just that. Eventually.