UK budget 2010: New era of austerity in Europe?

Between 1993 and 2000, the former slashed spending as share of GDP by 12 percentage points, while the latter cut spending by 14 percentage points. Canada cut thousands of education and health-care jobs, but the reward, like that for Sweden, was vigorous economic growth driven by a rejuvenated private sector.

The Canadian model

Britain is set to follow the Canadian model, which featured a "bloodbath budget" in 1995 when departmental spending was reduced by an average of 20 percent. Only Britain's health-care and international development spending will be spared. The government has promised to evenly distribute the burden.

"Overall, everyone will pay something, but the people at the bottom of the income scale will pay proportionally less than the people at the top. It is a progressive budget," Osborne said today.

"People will be with you on the great national target of protecting the next generation from these increasing deficits if they believe that they are going to succeed," Paul Martin, Canada's former prime minister and finance minister, said on the BBC recently. "Public opinion was pretty much with us all the way because we spent a year essentially preparing Canadians. We made it clear that cutting the deficit was important ... in terms of the things that counted in their daily lives."

A balancing act

But those arguing against the Canadian model point out that it was rolled out at a time of major growth in the United States, which generated demand for Canadian goods. By contrast, Britain's biggest market, the eurozone, is limping along.

Canada also had room to cut interest rates. Britain's monetary policy cannot be loosened up much more, add critics. They also say Canada's course widened income gaps. "It's important to consider the outcome of what they did in terms of health and child poverty, for example," says Kitty Ussher, a former Labour Party minister and now an economist for the left-of-center think tank Demos. "There is nothing that says recoveries have to be skewed in favor of spending cuts, rather than a mix of cuts and progressive tax rises," she says. "If [the government] wants to pursue only spending cuts ... that is the best way of getting a double-dip recession, along with negative social outcomes."

Proponents of the Canadian model point out that private-sector investment played a more significant role in Canada's recovery than trade. But some fear that Britain may be tempted to increase taxes.

That would risk replaying two disastrous experiences – those of the US in 1937 and Japan in 1997 – both of which relied on tax revenue to cut deficits. "In both cases it led to recession, and outright depression in Japan's case," says former Bank of England economist Danny Gabay, a director of Fathom Consulting. "If you block every hole it's difficult to see how we can breathe. If you are going to cut off government spending and whack the household sector through VAT [value-added tax] rises at a time when the European market is slowing down, then it is difficult to see how you can sustain growth. It's a very fine balancing act."

Related:

• World debt crisis: eight reasons you should care
• Can the European Union survive the debt crisis?
• All Britain news coverage

Previous

1 | 2