Canada's shift from pariah to fiscal darling provides lessons for Washington as lawmakers find few easy answers to the huge U.S. deficit and debt burden, and for European countries staggering under their own massive budget problems.See also Dan Mitchell's chart of the effect of Canadian spending cuts on the budget deficit:
"Everyone wants to know how we did it," said political economist Brian Lee Crowley, head of the Ottawa-based thinktank Macdonald-Laurier Institute, who has examined the lessons of the 1990s.
But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth.
It would eventually oversee the biggest reduction in Canadian government spending since demobilization after World War Two. The big cuts, and relatively small tax increases, brought a budget surplus within four years. . .
The Liberals thought their first, rushed budget -- delivered in February 1994, three months after taking office, was tough.
It reformed unemployment insurance entitlements, and cut defense and foreign aid, as well as closing some business tax loopholes and ending a C$100,000 lifetime capital gains exemption. The savings totaled C$10 billion over two years.
The government said it would review all programs and predicted a deficit of 3 percent of GDP in 1996. But program spending was still budgeted to rise slightly, and the budget was widely seen as a failure.
Pete DeVries, who headed the fiscal policy division, remembers overhearing chatter from economists' and others as he waited for a flight to Toronto just after the budget.
"The mood was so depressed on that plane that I thought we're never going to get off the ground and if we did get off the ground we'd crash, because it was just doom and gloom," he said. "Everywhere you heard the words, 'They don't get it. They just don't get it.'"
Voters certainly didn't get it. People who had canceled vacations or taken a second job to make ends meet in the recession couldn't understand why Ottawa thought it could live beyond its means. . .
At one 1994 cabinet meeting, Martin announced a spending freeze. A minister put forward a project that needed funding but [Prime Minister] Chretien cut him off, reminding him of Martin's freeze.
A second minister raised his hand to ask for funding, and a testy Chretien told the cabinet that the next minister to ask for new money would see his whole budget cut by 20 percent.
Chretien's scrappiness, which was one result of his upbringing in a working class family in rural Quebec, had already earned him the nickname of "Dr. No" when he was finance minister in the 1970s.
"The prime minister was the man with the steel rod up his spine. He was inflexible," Manley said.
For ministers it was brutal. Manley lost half his budget as industry minister in the 1994 budget and went from 54 programs down to 11.
"Everyone knew they had to face the music, and they did it," Chretien said in the interview in his law offices. "They had no choice. There was no great debate. I had made my view very clear."
The ratio of spending cuts to tax hikes was seven-to-one. Asked why, Chretien said simply: "There was more need on one side than the other."
That contrasts with proposals this year by President Barack Obama and the Democrats to have a much higher proportion of revenue increases in the deficit-tackling mix.
Canadian ministers were told how much they had to cut and then told to come back with a plan on how to do it. Cuts ranged from five percent to 65 percent of departmental budgets and included controversial cuts in transfers that help provinces pay for health and education, decisions that lengthened medical waiting lists for years to come.
Chretien exempted just a few areas from the cuts, including the Department of Indian and Northern Affairs. He also blocked big changes to benefits for the elderly and made sure tax collectors had enough resources.
In the end, program spending (everything except interest payments on the debt) fell by about 12 percent, or C$14 billion, between 1994-95 and 1998-99. The percentage fall was substantially more after adjusting for inflation.
The gloomy Canadian reaction to the 1994 budget changed to applause in 1995. "People came up to me to say, 'You guys got it,'" DeVries said.
The deficit disappeared by 1997 and the debt-to-GDP ratio began a rapid decline -- it is now at about 34 percent.
"The entire political class decided to stop treating this as a matter of political contention and started treating it as a matter of national interest," said Crowley, the political economist.
Wednesday, November 23, 2011
Randall Palmer and Louise Egan provide "Insight: Lessons for U.S. from Canada's "basket case" moment" (alternate link) (emphasis added):