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Canada's former prime minister Jean Chrétien sat down with Reuters in his law offices to describe how his Liberal government eliminated the country's deficit in the 1990s. (BLAIR GABLE/BLAIR GABLE/REUTERS)
Canada's former prime minister Jean Chrétien sat down with Reuters in his law offices to describe how his Liberal government eliminated the country's deficit in the 1990s. (BLAIR GABLE/BLAIR GABLE/REUTERS)

The lesson from Canada on cutting deficits Add to ...

“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 Mr. Crowley, the political economist.

After wrestling the deficit to the ground, Canada enjoyed what Mr. Crowley calls the payoff decade, outperforming the rest of the G7 on growth, job creation and inward investment. From 1997 to 2007, it averaged 3.3 per cent economic growth. while U.S. growth averaged 2.9 per cent.

SHEER DUMB LUCK

Canadians are the first to admit that a lot of their success was the result of good timing that cannot be replicated today. The rosy global economy then contrasts with today’s turmoil. There was no euro zone crisis to worry about. The United States and China were growing fast, demanding Canadian exports. Nobody else was reining in spending.

Mr. Clark says the U.S. dollar’s role as the world’s reserve currency may be disguising Washington’s problems and means the critical period could be a ways away.

“There’s no market discipline,” Mr. Clark said. “People want to buy U.S. Treasuries and they always know they will get paid.”

The parliamentary political system also helped Mr. Chrétien, since there is no effective division of powers between the executive and legislative branches as in the United States. A prime minister with a majority in the House of Commons can push through whatever he wants.

And politicians were almost all on board. The opposition Reform Party was screaming for even deeper cuts and public opinion was ahead of the politicians in calling for austerity.

SACRED COWS

Some of Canada’s lessons are applicable elsewhere and Britain’s Liberal Democrats and the Conservatives both cited the Canadian model when peddling their austerity plans to voters in their successful 2010 election campaigns.

Mr. Chrétien said he had had no qualms in telling Britain’s coalition government that it was wrong to exempt areas such as the National Health Service, regarded as sacred by many in Britain, from the drastic spending cuts.

“I told them they made a mistake,” Mr. Chrétien said. “I remember talking with a very senior person in health who said to me privately, ‘I’m not very happy that I’m exempt’ ... He needed the same pressure as the others.”

The Canadian mantra was to go big, spreading the pain and sparing no one, to prevent rivalries and resentment.

“You have to take immediate action and it’s got to be primarily on the spending side ... but at the same time everybody has got to come to the market and that really means tax increases as well,” Mr. Martin told Reuters in August.

CANADIAN LESSONS

Members of the deficit-slaying team have since advised countries as far ranging as Bahrain and Bangladesh. Canada has touted its fiscal record to push for co-ordinated deficit reduction in the Group of 20 most powerful economies.

Some veterans of Canada’s successful rebound believe the United States needs a value-added tax similar to the goods and services tax (GST), which Canada’s Conservatives introduced in 1991.

The Liberals say they were pragmatic, not ideological, on taxes. But they could not boost tax revenues much because Canadians’ top marginal income tax rate was already uncompetitive at around 55 per cent and the unpopular GST was already on the books.

Reform Party’s Mr. Manning said the U.S. spending-versus-tax debate does not have to be a question of either/or, but he saw a lesson from the way Ottawa cut its own fat before holding out its hand to taxpayers.

“So you don’t completely rule out tax changes or tax increases in the future, but you make them conditional on achieving a certain degree of financial order now,” he said.

Former bureaucrats also say flat, across-the-board spending cuts are a bad idea, even though it’s more palatable to staff to shave 5 per cent off the top of each program.

Unless whole programs are killed, departments might simply postpone vitally needed capital spending, including such things as maintenance and repair, and have to boost it back to former levels within a few years.

The final lesson is that you can impose painful spending cuts and still win elections. Mr. Chrétien went on to win two more back-to-back to form majority governments, a rare feat. He argued that a responsible Liberal who believes the state has a role in reducing poverty can only do so by ensuring a financially healthy government.

Mr. Drummond, who later moved to the private sector and is now an adviser helping the Ontario provincial government slash its deficit, noted that governments on the right and left in Saskatchewan, Alberta and Ontario won more voter support after their own budget cuts in the 1990s.

“Brutal, brutal fiscal restraint, and all won majority governments right afterward,” he said.

Reuters

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