By Niels Veldhuis
and Jason Clemens
The Fraser Institute
As Prime Minister Justin Trudeau delivers his first budget next week, one that reportedly contains a deficit in excess of $30 billion, his government may want to consider the lessons learned by former Prime Minister Jean Chretien and then-finance minister Paul Martin.
Back in the early 1990s, Chretien and Martin inherited a dismal fiscal situation but wasted their first budget by failing to deal with the significant federal deficit and growing debt. A year later, thanks to external pressures, the Liberals delivered an historic budget that fundamentally changed Canada’s 30-year history of tax, spend, and borrow governments.
Prime Minister Trudeau and his government would do well to take note.
In October 1993, Jean Chretien’s Liberal Party was swept into office with a landslide victory and inherited a near crisis fiscal situation with a deficit of 5.3 per cent of GDP and debt that had ballooned to 80 per cent of GDP.
While the Liberals pledged to address the fiscal situation, their first budget increased both taxes and spending.
Over the next year (1994), the federal government’s finances further deteriorated. Thankfully, a number of external factors motivated (some argue forced) the government into action. These included a unified, ideologically coherent opposition in the form of Preston Manning’s Reform Party that established a parliamentary environment receptive to and supportive of many of the fiscal reforms proposed and enacted by the Liberals.
In addition, a broad array of think-tanks, advocacy groups, and business organizations had been educating the public on the risks and costs of the deficit and debt. Reforms implemented in Saskatchewan by Roy Romanow’s NDP government and in Alberta by Ralph Klein’s Conservatives created growing political consensus regarding the need and efficacy of change.
These and other factors culminated in the delivery of the Liberal Party’s 1995 budget – one of the most important budgets in modern Canadian history.
In his 1995 budget speech, Finance Minister Paul Martin boldly articulated a new direction for the government: “We are acting on a new vision of the role of government . . . smaller government . . . smarter government.” Importantly, Martin put the issue of the deficit in non-partisan terms by stating that “The debt and deficit are not inventions of ideology. They are facts of arithmetic.” Specifically, the 1995 budget cut government program spending by almost 10 per cent over two years. Many federal departments saw reductions in spending of more than one-third over a three-year period: regional agencies (subsidies) were cut by 49 per cent, transportation by 51 per cent, agriculture by 40 per cent, and spending on human resource development was cut by 35 per cent.
The importance of the 1995 fiscal reforms can scarcely be exaggerated. The federal government shrank significantly and balanced its budget within three years. Balanced budgets and lower debt helped lower interest costs. Smaller interest payments meant that more money was available for government programs and tax reductions.
Of course the 1995 Budget had its critics; many groups vocally opposed the austerity program and argued that it would result in lower economic growth and perhaps even a recession.
As many of us predicted, the reverse actually happened.
The reforms of the 1990s greatly contributed to the country’s robust economic performance over the next decade. Canada entered a pronounced period of economic prosperity characterized by strong GDP growth, gains in individual income, strong employment growth, and low unemployment.
From 1997, the year the federal budget was balanced, to 2007, Canada outperformed all G7 countries, including the United States, on economic growth per person. It also outperformed other countries in job growth; total employment in Canada grew at a rate more than double that in the U.S. Canada also had higher growth in investment than any other G7 country, including the U.S., from 1997-2007.
By improving Canada’s fiscal fundamentals, governments also ensured that Canada was better able to weather recessionary storms. There is no doubt that Canada fared better in the recent recession than many countries, including the U.S., because many of the fundamentals were better here, including federal and provincial finances.
Rather than put this wonderful history at risk by running irresponsible deficits, Prime Minister Trudeau should not waste a budget but rather get to the task at hand, which is improving economic performance. The Chretien Liberals showed that smaller, smarter government, competitive taxes, and less debt is the foundation for a prosperous economy.
Niels Veldhuis and Jason Clemens are economists and co-authors of Learning from the Past: How Canadian Fiscal Policies of the 1990s Can Be Applied Today.