Britain’s headache

There are no short cuts on the long journey back from fiscal crisis—take it from someone who knows. Paul Martin was a rookie cabinet minister when he assumed the reins of Canada’s Finance Department back in 1994. But as a businessman, he understood a balance sheet, and the politician in him sensed the risk of promising half-measures. “You cannot tell people it’s going to be easy and then think they’re going to accept harsh medicine,” the former prime minister says from his office in Montreal. “And don’t think people are going to stay with you through the tough measures if you don’t hit your targets.”

To many Canadians, Martin’s role in leading the country from the brink of financial ruin is now a fading memory, overshadowed by his anticlimactic turn as prime minister. But in Britain, where five days of fevered negotiation this week produced a minority Conservative government, he is an exemplar to those contemplating the Herculean task that lies in wait: tackling the U.K.’s disastrous finances. “What Paul Martin did has been incredibly influential in Whitehall and academic circles,” says Patrick Dunleavy, a political scientist at the London School of Economics. “It’s seen as a good way to go about budget rebalancing, while limiting the damage that’s done in the process.”

As oracles go, Martin seems rather modest. But these days the Brits will take what they can get. With a deficit expected to top 12.6 per cent of gross domestic product this year, and Britain’s debt load pushing $1.3 trillion, the country’s predicament looks a whole lot like Canada’s around 1995, when the Wall Street Journal declared us an “honorary member of the Third World.” Britain’s public sector accounts for more than half the country’s economic activity, and in some communities more than three-quarters of the population draws its income from the public purse. Yet hiking taxes further might choke off the country’s fragile economic recovery, necessitating even deeper cuts in the future. In short, new Prime Minister David Cameron has bitten off one of the greatest challenges in the country’s postwar history.
Small wonder, then, that a crowd of economists, academics, civil servants and diplomats packed an auditorium in Watford, England, a few months ago to hear a 71-year-old from Windsor, Ont., impart the wisdom of harsh experience. Martin’s advice ranged from the obvious (“prioritize services you want to save”) to the bloody-minded (“cuts to government hurt people”). But the theme was consistent: “People will follow you if they think you’re giving them the straight goods,” he says. “That was what I believed in 1995, and that’s what I told them in England.”

Of course, Canadians had been softened up for Martin by a decade of warnings from economists and bond-raters that the country’s spending was reaching unsustainable levels. When asked whether Britons have reached the same stage, John Curtice, a University of Strathclyde professor who studies public opinion in the U.K., suppresses a laugh. Many cling to the view that there is waste in the public sector to be cut, he says, when the truth is that even with tax hikes, Britain’s budget will require substantial reductions in front-line services to balance. “Ask people if the deficit should be cut sooner rather than later,” he says from his home in Glasgow, “and you still get a pretty even split down the middle.”
That’s in part because their political leaders seem uneager to snap their illusions. The month-long election campaign was unnervingly free of road maps to fiscal probity, with only Cameron promising to slash $9 billion in “wasteful” government spending next year. Labour’s Gordon Brown had said his government hoped to eliminate the deficit by 2017, yet offered few details during the election race as to how he would do so, while another Labour promise to hold the basic income tax rate at 20 per cent would have offset much of his cutting. The left-leaning Liberal Democrats, meanwhile, proposed raising the amount Britons can make before paying taxes to $15,000—a measure that would almost certainly expand the deficit.

Now, with control of Parliament hanging by a thread, the fear is that the new government can’t administer harsh medicine even if voters wanted it. With 57 seats in the Commons, the Liberal Democrats hold the balance of power, and leader Nick Clegg made it clear during the campaign that his tax breaks were a top priority in any coalition negotiation—a position that would curb the government’s ability to make inroads on the deficit. Brown took Labour out of the picture on Tuesday by resigning his position as prime minister; in three days of talks the party was unable to reach a deal with the Lib Dems. But the Conservatives’ 306 seats left them just shy of the number 326 necessary to survive a budget vote. They too need Clegg’s support.

The Lib Dems’ long-standing demands for electoral reform presented another hurdle to parliamentary stability, as Clegg’s desire for a straight-up system of proportional representation would virtually preclude majorities for Labour or Conservatives in the foreseeable future. Brown had offered the compromise of a so-called “alternative vote” system, where voters rank candidates in each riding by preference, but it wasn’t enough to win Lib Dem support. And that was considerably more than the Conservatives had on offer, which was a nationwide referendum on whether to switch to alternative vote.

Surprising then, that the Tories and Lib Dems resolved the impasse by forming what Cameron described as a “proper and full coalition.” Not all details of the arrangement were available at press time, but Clegg had clearly been swayed by Conservative overtures in the aftermath of the election indicating they’d be willing to share power. Among other things, the Tories offered to give up cabinet seats to the Lib Dems, with Clegg taking the post of deputy prime minister. In return, the Lib Dems appeared to have softened their electoral demands, accepting the Tories’ promise of a referendum on the alternative vote.

Will the deal last long enough for the government to take decisive steps? Observers say it could, and point to Canada by way of example. The Harper Conservatives have governed with authority through two successive minority parliaments, notes Dunleavy, in no small part because the opposition Liberals have been divided or disorganized, much as Labour is today. Moreover, the other parties have felt duty bound to spare voters the expense and divisiveness of frequent elections (though they did come close to toppling the government in late 2008, prompting Harper to shut down Parliament through prorogation). The same sentiment seems to be slowly taking hold in the U.K.

And that, in turn, has opened the way for Cameron to establish his bona fides as a deficit fighter. “I think the financial situation has been the elephant in the room here for some time,” says Colin Mellors, a political scientist at the University of York, in northeastern England. “The electorate wants somebody they can trust to do the right thing.” It is a political gamble of the first order: Mellors speculates that Labour might be secretly pleased to sit out the next few months while the Tories do the heavy lifting. “But politicians can be valued and respected even if they are not liked,” he adds. “If the Conservatives come in and are seen to turn things around, they’re going to get the benefit.”

British Tories aren’t the only ones with a stake in the outcome. Whatever its current challenges, the U.K. remains one of the world’s linchpin economies, and anxiety outside the country is running high. No sooner had the EU and IMF announced last week’s $1-trillion bailout package for Europe’s debt-ridden economies than the French-based investment bank BNP Paribas warned that a Labour-Liberal Democrat coalition in the U.K. would “almost guarantee” a downgrade to Britain’s sovereign debt from its current AAA rating. Mere rumours of talks between Brown and the Lib Dems, meanwhile, sheared a cent off the pound in just two minutes of trading against the U.S. dollar, while the Institute of Directors, representing the titans of London’s corporate community, urged the parties to abandon talk of electoral reform and focus on the economy.

It’s the sort of pressure that provides the new government with the cover to at least get cracking—though even Martin acknowledges that Cameron’s task “would be a whole lot easier with a majority.” The Liberals had three of those while he was finance minister, not to mention 10 provincial governments with whom to share the burden of cost-cutting. So the transatlantic analogies only go so far. Still, it’s nice to think the lessons of those painful years have registered beyond our borders, and if Britons find solace in the words of one luckless former prime minister, then so much the better. Considering the scale of their need, it doesn’t seem much to ask.