by Fergus Hodgson
Director of Fiscal Policy Studies
In 1993, Canada’s federal debt was equal to 67 percent of the nation’s annual economic output, and in 1995 the Wall Street Journal called it an honorary member of the third world.
How times have changed. By 2009, that level of debt had fallen to 29 percent of economic output, and Canada’s debt appears to be far more manageable than that of the United States.
So how did they do it?
A concise report from the Frontier Centre (Canada) and the Mercatus Center says “Canada did not resort to major tax increases to eliminate its budget deficit and reduce public debt… [They] did not merely reduce the growth rate of government spending–the government cut absolute spending on many programs…” [Emphasis mine]
Regarding taxes, they “increased by about one dollar for every six or seven dollars worth of spending cuts.”
Even better, “Throughout the austerity era, Canada experienced strong economic growth,” undermining Keynesian fears.
The take home message, as fiscal incompetence at the federal level fosters uncertainty in financial markets:
“Even very large budget deficits can be turned around through real cuts to government spending, with no major increases in taxes.”
Click here or above for an insightful interview with the author, David Henderson, conducted by Peter Holle, president of the Frontier Centre (18 minutes). Henderson is a native of Manitoba, Canada, but he is an associate professor of economics at the Naval Postgraduate School in Monterey, California. He was also a member of Ronald Reagan’s Council of Economic Advisers.