Britain's Chancellor of the Exchequer Rachel Reeves speaks during a press conference in the Downing Street Briefing Room in Downing Street, London, on March 26, following the Spring Budget Statement.BEN STANSALL/Reuters
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
Britons might find some echo of the past in Canada’s current election campaign. Party leaders are promising various tax cuts and goodies, without saying how they would be paid for. It’s a dangerous path.
There’s something of a cautionary tale unfolding in Britain which both Canadian politicians and voters would do well to watch. It shows the sad fate which awaits politicians who don’t level with the public during election campaigns.
Last summer, Britain went to the polls, at a time it faced many of the same problems currently besetting Canada: a weak economy, stagnant productivity, a housing crisis and a beloved public-health care system which was slowly collapsing.
Amid this gloom, the governing Conservatives faced certain defeat. So, in the run-up to the election, the party promised that if re-elected, it would cut taxes. It was a ridiculous pledge, since the only way they could keep it would be to run down public services more than they’d already done, whereas the public were in fact demanding the opposite - improvements in everything from health care to train schedules. But it was a clever ruse: since they were sure to be defeated, they knew they wouldn’t have to keep the promise, but making it forced the opposition Labour Party to say whether they would match it. In effect, they laid a trap for Labour.
Labour finance critic Rachel Reeves fell right into it. Anxious not to allow the Tories to depict her party as a bunch of “tax-and-spend” radicals, she promised not to raise taxes on working people – which covered incomes taxes, employee contributions and value-added tax (a sales tax), which together comprise most of Britain’s tax revenue.
The gamble worked, and the party won a landslide victory. Thereafter, things quickly went downhill. When Ms. Reeves – now Chancellor of the Exchequer – presented her first budget in the autumn, the only way to meet her promise to improve health care and living standards was to shift the burden onto the shoulders of employers. She raised the minimum wage and the employer contribution for national insurance (roughly, the British equivalent to Canada’s employment insurance and pension contributions).
The result was predictable. Faced with this rising cost of hiring, employers reduced it and cut back on investment. That slowed the economy. The slowing economy then reduced the government’s projected revenues, which increased its borrowing. Increased borrowing then drove up interest rates, which only worsened the government’s fiscal position since it had to pay more in debt interest.
Faced with this fiscal crunch, but saddled with her promises, Ms. Reeves was forced to begin slashing government spending to keep the situation from getting worse. She is now cutting the welfare bill, producing dreadful optics: the party which created Britain’s welfare state is now starting to dismantle it, piece by piece.
Meanwhile, the economy gets worse. With the government cutting spending but businesses not taking up the slack, demand is dropping. There’s now every expectation that come the autumn, the government will have no choice but to either raise taxes or scrap its promises to improve public services – and this is before any impact that might come from Donald Trump’s trade war gets factored in. Needless to say, the British public are pretty angry.
This is something Canada’s politicians should keep in mind, because given the promises they are making, they’ll face a similar fate. Liberal Leader Mark Carney has proposed a tax cut that would result in $400 in savings a person. Conservative leader Pierre Poilievre upped it to about $900 a year. Those are just a part of the dribs and drabs of promises they have dangled that would be hard to keep once in government.
The inescapable fact is that in the very best circumstances, the pressure on Canada’s budget is going to get worse for the foreseeable future. The country has an unresolved housing crisis and a health care system under growing strain. That would tax any government at the best of times, but then add in the virtual certainty of a recession, which will both reduce revenues and trigger countercyclical buffers that will raise spending, and the deficit will get worse. Politicians need to level with the public how they plan to plug this gap while helping the country to make the transition to an economy which is more resilient in the face of its evolving relationship to the United States.
So when they promise tax cuts or new spending, they should do what Ms. Reeves failed to do – provide a convincing accounting for how they’ll pay for it. If they say “eliminating waste,” they’re probably making it up; if they say faster economic growth, they’re crossing their fingers behind their back. That was Ms. Reeves’s answer; the growth never came.
Once in office, leaders making generous promises will be forced to do as Ms. Reeves is doing – either slowly destroy Canada’s social contract or break their promise and raise taxes. Canada will then find itself in the same downward spiral as Britain.
Of course, while the British public now feel Ms. Reeves lied to them, it’s possible she felt she had to because they wouldn’t accept the truth. Canadians should demand truth-telling from their leaders, but they should also be ready for – indeed, should demand – hard truths. Because as Britain shows, if they don’t get them now, they’ll be sure to get them later.