Posted at Americas Quarterly on August 23, 2011
In the wake of the debt ceiling debate in the U.S. and Euro zone summits about the precarious financial situation of some of its members, articles and editorials in The Wall Street Journal and the Washington Post have referred to Canada as a potential model to emulate in order to eliminate deficits and reduce the debt. They refer to how deficits in Canada in the early 1990s were eliminated mostly through spending cuts, and how tax cuts were the source of the growth that put Canada’s fiscal house back in order.
There is some truth to this narrative but it is highly incomplete and one needs to state that the overriding factor in Canada's success had more to do with a political class of different stripes working together, although not without debate or conflict. In practical terms, a federal Liberal government in Ottawa, which was not allergic to an activist governmental agenda, decided to lead the way to a balanced budget. The message was clear: problem solving must take precedence over winning ideological and partisan battles. Even social democratic parties like the NDP in Manitoba and Parti Quebecois in Quebec were willing to put their ideology aside and exact serious spending cuts.
In the early 1990s, the situation in Canada was dire. Deficits were 5 percent and 6 percent of GDP—substantially above the 3 percent imperative. Debt was 70 percent. of GDP and growing. Almost one out of three dollars spent then by the government went to pay the debt. The Wall Street Journal was not touting a Canadian miracle then, rather a debt-ridden country that was on its way to a third-world status. It also went on to dub the Canadian currency the “northern peso.” Moody’s acted and downgraded Canada’s credit rating from AAA.
Each province, irrespective of political party ideology, addressed the issue head on. The Canadian federal government reduced transfer payments to the provinces forcing them to make deep cuts to their operations. The feds applied similar austere measures to their programs. Tax reform resulted in a streamlined value added tax that brought in important new revenues. By the end of the decade, budgets were in balanced territory, debt was being pared down and yes, personal, as well as corporate taxes were then being reduced.
My home province of Quebec followed the national pattern to some extent, and in the first decade of the new century, it was balancing its annual budget and had set up an intergenerational fund to reduce the debt. The 2008 recession soon brought back deficits but all governments in Canada expect to be in equilibrium by 2015 through a mix of spending cuts, infrastructure investment spending, innovation, research and development programs, trade agreements and new revenues.
Each country has its own dynamic, often conditioned by its political institutions and culture. There is no one-size-fits-all solution to eliminating deficits, reducing debt and spurring economic growth. So we must be careful when the success of one country leads some to generalize about how to solve a similar problem in another.
The American economy is the largest economy in the world and how it deals with its slow growth economy, high unemployment, huge deficit, and climbing debt will impact the world economy. Will policies that could lead to a double-dip recession prevail? Will confrontation eliminate any possibility of compromise or finding solutions?
The Canadian way, while laudable, may not be the magic formula. A pragmatic, balanced and non-ideological approach requiring spending cuts, new revenue and adopting job stimulus measures aimed at solving the problems, is.