The upstart Reform Party, then the main national opposition party, had campaigned on “zero-in-three” – balance the budget in three years. “We were always trying to go faster,” said Reform’s leader at the time, Preston Manning.
Three months later, Moody’s Investors Service lowered its rating on Canada’s foreign currency debt, citing the government’s large and growing debt.
In December, 1994, Mexico suffered a run on its currency and the following month The Wall Street Journal stung with its “Bankrupt Canada” editorial, lumping Canada with Mexico as a country that might need an International Monetary Fund bailout.
STIFFENING SPINES, AVOIDING CLIFFS
The Liberals were stung by the criticism and, at first reluctantly, but then with gusto, they got out the chain saws.
“I think the Moody’s and Wall Street Journal stuff reflected what we knew inside,” said then industry minister John Manley.
Cutting government spending programs went against the Liberal grain. Contrary to the Reform Party, the Liberals saw a more important role for government.
Paul Martin now has a lasting reputation as the finance minister who slayed Canada’s deficit, but the conversion from spender to cutter was painful. His father, also called Paul, had helped create Medicare, Canada’s publicly funded health care system, and suddenly here was Paul Junior contemplating massive cuts.
Mr. Clark remembers riding in a taxi with Mr. Martin after meetings in New York.
“He said, ‘I don’t want to do this. I don’t want to do this.’ And I said to him, ‘You don’t have any choice because if we don’t do it that means you won’t be able to keep the programs you’ve already got. We’re going to go over the cliff and we’ll be cutting like you won’t even believe,’ ” Mr. Clark said.
“We told him you are still a Liberal but you have to be a small ‘c’ fiscal conservative to be a nice good Liberal.”
In the end, Mr. Martin famously vowed to tackle the deficit “come hell or high water.”
Mr. Chrétien and Mr. Martin later parted ways bitterly, but they formed a formidable duo during the budget cutting.
At one 1994 cabinet meeting, Mr. Martin announced a spending freeze. A minister put forward a project that needed funding but Mr. Chrétien cut him off, reminding him of Mr. Martin’s freeze.
A second minister raised his hand to ask for funding, and a testy Mr. Chrétien told the cabinet that the next minister to ask for new money would see his whole budget cut by 20 per cent.
Mr. 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,” Mr. Manley said.
For ministers it was brutal. Mr. 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,” Mr. Chrétien said in the interview in his law offices. “They had no choice. There was no great debate. I had made my view very clear.”
MORE SPENDING CUTS THAN TAX HIKES
The ratio of spending cuts to tax hikes was seven-to-one. Asked why, Mr. Chrétien 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 5 to 65 per cent 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.
Mr. Chrétien 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 per cent, or $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,’ ” Mr. DeVries said.
The deficit disappeared by 1997 and the debt-to-GDP ratio began a rapid decline – it is now at about 34 per cent.