The Canadian Century Project: How fighting deficits created an economic powerhouse

Brian Lee Crowley speaks at the Montreal launch of the Canadian Century, held on June 9, 2010.

With the federal government’s expected announcement of the first surplus budget since 2007, it’s a great time to review the many benefits of fiscal discipline that MLI’s research has demonstrated.

The accompanying video and updated infographic detail Canada’s previous deficit battles, and the lessons they hold. And in a new column in the Globe and Mail, MLI Managing Director Brian Lee Crowley writes on the hot topic of “balance budget legislation”. Because the power we entrust to politicians is both necessary but can be abused, successful democracies look for ways to establish guideposts for how we think that power ought to be used.

As we will see, in 1994 Canada was gripped by deteriorating public finances, persistent deficits, spiralling public debt and out of control entitlements. But in less than a decade we transformed ourselves from what the Wall Street Journal called an honorary Third World Country to an economic outperformer. Not only did we fix our immediate problems but we set ourselves up for some remarkable payoffs in terms of prosperity and economic growth, and Canada weathered the recession in 2008-’09 better than most other industrialized countries.

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As our infographic and video show, Canada sleepwalked into staggering deficits between 1973 and 1994, resulting in the decimation of the public purse. Federal spending grew from 15% of the economy in 1965 to 23% by 1993. Parties of both stripes produced profligate deficits year after year, despite booming economic growth. By the mid-1990s, interest costs were eating up over a third of federal spending.

But beginning with the federal Liberals’ 1995 budget, which subjected all government spending to intense review and cut public sector employment dramatically, the situation began to improve. Federal spending fell to just over 15% of the economy by 2008 and starting in 1997, surpluses became an annual event. Importantly, debt fell from over 70% of GDP to just under 30% by 2007. This allowed cuts to corporate and personal taxes, spurring even greater economic growth and even more revenue. As contentious as parts of this reform were, the results were staggering. In the decade following Canada’s first balanced budget in a generation the Canadian economy boomed.

What will this next decade bring?