Canada's Reversed Fiscal Crisis

In the mid-1990s, Canada’s Liberal Party was in charge of the federal government and set out on a determined course to cut Canada’s federal deficit and to reduce the federal debt as a percent of the economy’s Gross Domestic Product (GDP).

The federal government achieved these reductions in debt, not with large tax increases, but with substantial cuts in government spending. While Canada's 1995 budget, introduced by Finance Minister Paul Martin, did increase some taxes, the budget called for six to seven dollars in expenditure cuts for every dollar of increased taxes. Between FY 1995 and FY 1998, federal government program expenditure (government spending minus interest payments on the federal debt) decreased from C$123.1 billion to C$111.3 billion, a decrease of C$11.9 billion. Moreover, because Canada’s economy experienced mild inflation during this time, the cut in government spending in real (that is, inflation-adjusted) dollars was much larger. In 2002 Canadian dollars, program expenditures decreased from C$142.44 billion in FY 1995 to C$122.9 billion in FY 1998, a real decrease of approximately C$20 billion. This cut was a real decrease of 14 percent of the government’s budget over three years. It was not until FY 2003 that real spending reached the high level it had been at in FY 1995. By comparison, if the U.S. government were to cut real spending by 14 percent over the next three years, the budget in FY 2013 would be US$473 billion (in 2010 dollars) less than the FY 2010 budget.¹

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1. CBO reports total government outlays for 2010 were $3.456 trillion: www.cbo.gov/doc.cfm?index=12039.