Factbox: How Canada tamed its budget deficit

Mon Aug 8, 2011 6:29pm EDT

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(Reuters) - Canada took a decade to win back its prized AAA rating after debt downgrades in the early 1990s that were prompted by concern that its budget deficit was billowing out of control.

Here are some highlights of what took place over that decade, when a Liberal government tamed the deficit, with the backing of a conservative opposition party.

October 1992 - Standard & Poor's cuts its rating on Canada's foreign-denominated government debt to AA-plus from AAA on concern about the current account deficit, a growing government debt load and uncertainty about the political situation in French-speaking Quebec, home to a popular separatist party.

June 1994 - Moody's Investors Service lowers its rating on Canada's foreign currency debt to Aa1 from Aaa, citing the government's large and growing public debt.

January 1995 - A biting editorial in the Wall Street Journal calls Canada "an honorary member of the Third World."

The article is headline news in Canada.

February 1995 - Liberal Finance Minister Paul Martin introduces a budget where deep spending cuts outweigh tax increases by seven to one. "Not to act now to put our fiscal house in order would be to abandon the purposes for which ... this government stands -- competence, compassion, reform and hope," he says. In a display of unity that's rare outside wartime, the right wing opposition party, the Reform Party, backs the spending cuts.

April 1995 - Moody's, which had warned of further downgrades even before the budget, cuts Canadian dollar debt from Aaa to Aa1. It also lowers foreign currency debt from Aa1 to Aa2, despite the fact that the markets had mostly supported the government's fiscal plans.

October 1995 - Quebec voters reject a proposal to separate from Canada, removing a layer of uncertainty that had pressured Canadian markets.

March 1996 - Canada's debt-to-GDP ratio peaks at around 72 percent of GDP in the 1995-96 fiscal year, ending March 31. (By way of context, S&P expects the U.S. debt-to-GDP ratio to end 2011 at 74 percent.)

February 1998 - With the budget already in surplus, Finance Minister Martin introduces a balanced budget for the first time in decades. The era of budget surpluses ends only when the Conservative government steps up stimulus spending to pull Canada out of the 2008 recession.

June 2000 - Moody's upgrades Canada's foreign currency rating to Aa1 from Aa2, leaving the domestic currency rating at Aa1.

May 2002 - Moody's restores Canada's Aaa rating for both foreign and domestic currency debt. Two months later, S&P follows suit, citing fiscal and current account surpluses along with low inflation.

2014-15 - Conservative government's target fiscal year to bring the budget back into surplus.

(Reporting by Allison Martell; editing by Janet Guttsman)

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Comments (3)
comments wrote:
I’m not sure that Canada’s example is one to be followed. Paul Martin solved federal problems by decreasing transfers to the provinces, and the provinces solved their problems by downloading responsibilities to the cities. At present, Toronto has a 700-million dollar deficit and the powers that be are weighing whether to cut down on snow-plowing in the winter or to close public libraries and recreation centres. And the combined debt of all levels of government is still 80% of GDP. There must be a better way.

Aug 08, 2011 8:33pm EDT  --  Report as abuse
CDN_Rebel wrote:
@comments That’s fairly naive – how much MORE would be if you included US state and municipal debts… Also, Toronto is about the size of Chicago – how much debt does Chicago have? I’ll bet your underwater mortgage that it’s a helluva lot more than Toronto’s (OMG did I just defend Toronto? *swallows hard*)

Also worth noting is one of the biggest cuts of that era was made to our universal healthcare – quality of service didn’t really suffer but availability is spotty on specific items

Aug 08, 2011 9:04pm EDT  --  Report as abuse
This article failed to mention the large influx of investment into the Canadian economy as a result of the opportunistic entrepreneurial immigration policy. Canada fashioned an immigration policy that absorbed a large chunk of wealth from the rich, elite, and well- educated young people from Hong Kong just before the 1997 handover of the former British colony from China. Not only did Canada attracted many of the most successful and rich businessmen to invest in Canada in exchange for dual citizenship, it absorbed many smart, technically well trained and educated young folks without ever paying for their education. Canada predicted that a larger population was required to fulfill its economical potential, and carefully crafted legislation to absorb exactly the category of technical personnel most needed for its economy, and to the exact optimal number of people to be taken. The real estate market was a boom because many of the rich new immigrants bought real estate in cash, resulting in significant increase in tax revenue for the Canadian Government. This significant factor may not be reproducible in the United States because of the same political quagmires that got us here in the first place. In addition, the rise of xenophobia makes the United States much less attractive than Canada for this type of investment. Canada has quite successfully integrated Asians as the second largest ethnic group with great harmony, cruising on the benefits thereof; whereas the United States is greatly hampered by an increasing trend of scapegoating immigrants, and never accepting any responsibility of one’s own on just about every subject matter.

Aug 08, 2011 10:09pm EDT  --  Report as abuse
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