Must-Read: Marshall Auerback: The United Kingdom Draws the Wrong Lessons from Canada

Graph Gross Domestic Product by Expenditure in Constant Prices Total Gross Domestic Product for the United Kingdom© FRED St Louis Fed

Must-Read: Marshall Auerbach was, of course, 100% right. The turn to severe austerity in 2010 by the then-newly elected Conservative-Liberal Democratic government looks to have cost Britain 4% of GDP in a slowing-down of recovery. It was not quite enough to knock the UK back into recession–in large part because the government in the end did less to cut spending than its manifesto had committed it to. But it was very damaging.

British Conservatives tell me to this day that this was all Melvyn King’s fault: that he could have eased monetary policy to offset the effect on spending, but did not do so, probably, they say, because he is a crypto-Labourite…

Marshall Auerback (2010): The United Kingdom Draws the Wrong Lessons from Canada: “The standard narrative of the Canadian experience in the 1990s is…

…in 1993, Canada’s budget deficit and debt-to-GDP ratios were the second highest amongst the G7 countries, after Italy’s, and the US financial press was unfavorably comparing Canada to Mexico. That year, with the IMF supposedly lurking at the door, the Liberal Government of Prime Minister Jean Chretien, and his Finance Minister, Paul Martin, laid out a goal to halve the budget deficit to three percent by 1998…. By 1998, the deficit was eliminated and overall debt was dropping quickly, amidst a rapidly growing economy….

Professor Mario Seccareccia… noted the real reasons for the “success” of the Chretien/Martin austerity programs: 1. High growth in the US, Canada’s largest trading partner, a sharply declining Canadian dollar… the implementation of the North American Free Trade Agreement… [and] an expansionary monetary policy…. Canada’s export boom of the 1990s is a miracle that could certainly not be repeated today, given the decline in global economic growth, and the extent to which the ailing manufacturing exports sector is now being hammered by the so-called “Dutch disease” as a consequence of the Canadian dollar’s relative strength…. The United Kingdom would hardly do any better today, given global recessionary pressures and the corresponding implosion of its largest export markets in Europe and the US.

If Prime Minister David Cameron is indeed preparing Britons for a Canadian-style attack on the deficit, he is acting on the basis of profoundly misguided historical information…

August 4, 2015

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