George Osborne has discovered Canada. It is, he tells us, a marvellous faraway land where a fearless government once managed to eliminate its entire budget deficit in three years.

George OsborneBetween 1994 and 1997, Prime Minister Jean Chretien reduced the Canadian deficit from 9 per cent to a small surplus. Laying into pampered civil servants like so many baby seals, he once clobbered 20 per cent off government spending in a single year.

And then the Canadian economy boomed, growing at an annual rate of 5 per cent by the end of the decade. So much for the naysayers, with their silly fears of a double-dip recession brought on by spending cuts.

It’s a marvellous story, the sort of thing parents could retell at bedtime if they want their children to grow up into bond traders.

Osborne’s new little helper, Danny Alexander, has his own, very special, Lib Dem version of it. He and Nick Clegg think there will be only warm, cuddly “progressive cuts” to public services.

Who could possibly object?

Santa Claus

Unfortunately, like Father Christmas and “compassionate conservatism”, Canada’s feel-good spending cuts never existed.

45,000 public sector employees lost their jobs. Education and health spending were slashed. Unemployment benefits were savagely reduced. Even now, only 38 per cent of unemployed Canadians receive any government assistance.

The number of children living in poverty increased from 1 in 7, to 1 in 5. After decades of decline, inequality rose sharply. The poor got poorer. Rich Canadians got spectacularly richer.

Canadians were not “all in this together”.

Fairy stories

But perhaps the biggest fairy story of all is that the cuts boosted Canada’s economic growth. That shrinking the public sector cleared a space for private initiative.

Bureaucrats, we are told, were swapped for entrepreneurs. Canada’s economy boomed as a result.

The truth is rather different.

Canada grew on the back of the US. A bubble in the US stock market in the late 1990s pushed up demand for Canadian goods and services, helped by the falling value of the Canadian dollar.

This demand from abroad compensated for the loss in public spending at home. Exports grew to about 45 per cent of GDP by 2000. Far from freeing up private enterprise, the Canadian economy became even more tied to its bigger neighbour.

And, mirroring the build-up of household debt in the US, ordinary Canadians found themselves taking on more and more debt. Real incomes stagnated, so households turned to borrowing to cope.

Public debt declined. Private debt skyrocketed. Growth was based on the chimera of US share prices.

No such luck

The Chretien government got lucky. Without the irrational exuberance of the US bubble, there seems little doubt Canada would have entered a deep recession.

The Tories today have no such saviour.

The UK’s biggest trading partners, the countries of the eurozone, are locked in deep recession.

The falling value of the pound for a while helped push up exports. But with the euro in free-fall, that competitive advantage is dwindling. Exports fell last month.

Domestic demand is in no better position. Private investment, always weak, was battered by the recession.

Consumption by households has been tied to house prices, as consumers compensated for stagnant or falling real incomes through borrowing. Ominously, house prices may now have started to decline.

If exports are falling, investment is weak, and consumption is in danger, the only reliable source of demand inside the British economy is public spending.

Yet this is exactly what Osborne and friends wish to assault.

Spiral downwards

And so does every other major government. The final communiqu√© from the G20 summit in Busan, South Korea calls for “accelerating fiscal consolidation”.

Translated, this means faster cuts in government spending. Alongside weak consumer spending, that means domestic demand in every country will be squeezed. Countries will rely on their exports for growth.

But if demand is being squeezed everywhere in the world – who will buy all these exports?

It is exactly this combination of policies that helped prolong the Great Depression of the 1930s. It is, as liberal economist Paul Krugman put it, “utter folly”.

Against the Bankers’ Coalition

Yet there is now a consensus in Westminster on the need for sharp cuts, as soon as possible. The attack on public spending will be bigger than anything seen for generations.

Researchers at the reputable Institute of Fiscal Studies estimate that the Con-Dems will need to chop £67bn from government spending to meet Osborne’s targets. They are forecasting cuts of up to 25 per cent in some government departments.

As in Canada, cuts on this scale will cause immense pain. We are being asked by the millionaires in the Coalition government to bear the costs of the bankers’ crisis.

But the Con-Dems are worried that they have not persuaded the rest of us that this manifest injustice is in our own interest. So Osborne is launching a “consultation” over the summer – already derided by one Tory former Chancellor as a “PR exercise” – designed to soften up public opinion ahead of the Spending Review in the autumn.

The Coalition is right to be worried. They failed to persuade the electorate of their merits during the election. They have failed to break the attachment of most working people in Britain to the welfare state. Survey after survey shows consistent support for redistribution and welfare spending.

But passive opposition won’t stop them. The need to organise against the Bankers’ Coalition is becoming urgent. We have to claw back the political argument.

After a brilliant first meeting, the Can’t Pay, Won’t Pay campaign is joining others in protests outside Parliament on the day of Osborne’s emergency budget, 22 June.

In Greece, resistance from workers and the poor has pushed the government onto the back foot. In Spain, mass protests this week helped weaken the government’s resolve. We can take the first steps here towards breaking the cuts consensus.

James Meadway

Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).