Tuesday, December 7, 2010

Can Ireland Cut Budget Like Canada? No, Why Canada Did Not Fall Through The Cracks

In light of the deep budget cuts being proposed for Ireland, Rob Brown, Senior Lecturer in Journalism at Independent College Dublin, comments on the similarities and differences between Ireland's cuts and Canada's cuts: "Fiscal consolidation worked for the Ottawa government in the 2000s – but it won't be the same for Ireland now"

From the Irish Tribune: "Canada has become the prime bolthole for traumatised Celtic tiger cubs piling out of this banjaxed republic in planeload after planeload. The twinkling skyscrapers of downtown Toronto are the new Ellis Island for yet another generation of Irish emigrants, while Vancouver has become a snow-capped sanctuary where no one mentions the 'R' word".

Mr. Brown quotes Canada's finance minister, Flaherty, as having hailed Ireland as Europe's leader in fiscal reform: "Ireland certainly has led the European Union in taking the necessary decisions towards fiscal consolidation."

"Visit Canada, however, and you soon discover that Flaherty is flattering our finance minister. Deep down, he knows that draconian budgets cuts are the last thing any country, far less the world economy, needs as it teeters perilously on the brink of a double-dip recession or even another Great Depression".

Although a fiscal conservative to his fingertips, Flaherty can no longer walk the talk. He is so spooked by a downward spiral he has ceased to practise in Ottawa the creed he has preached throughout his political career – although he still preaches it in Dublin.

Flaherty's chief strategy for keeping Canada sheltered from the global financial storm has been to adopt a strikingly Keynesian approach. Even though he knew he would be demonised by dyed-in-the-wool conservatives, he swiftly decided "to stimulate the economy with government money, with taxpayers' money, to replace the absence of private demand".

Banks were different

Canadian banks are far better placed to weather a storm as they are much more regulated.

By the mid-1990s, Canada's national debt had rised to almost 80% of GDP. By 2007, after over a decade of fiscal responsibility, Canada's debt burden had been slashed to just 15% of GDP.

It was Paul Martin, however, the Liberal government's finance minister at the time, who designed the austerity plan and dragged the country back from the brink of bankruptcy in 1995. He implemented what he called "the largest set of actions in any Canadian budget since demobilisation after the second world war".

Relying on U.S.'s credit bubble, not so now

However, asgues Mr. Brown, Canada's "redemptive decade" "coincided with a credit-fuelled boom in the US. With the US accounting for almost 80% of Canada's trade, American prosperity contributed enormously to an expansion of the Canadian private sector. Without that, Canada's savage cutbacks could have been as catastrophic as Ireland's are currently proving to be".

"There is a time and a place for fiscal consolidation. Canada from 1995 to 2007 was one such place. Ireland in 2010 is anything but."

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