By Andrew Jackson
Martin himself has said that he's been engaged in “informal” discussions with several European ministers and senior officials seeking advice on how to confront that continent's debt crisis.
“'There's a huge, huge interest,' said Hamish McRae, a prominent columnist with the Independent, who recently advised readers that the route out of Europe's debt crisis was by following Canada's example. 'Boy oh boy. Canada, along with four or five other countries, is attracting tremendous attention here.'”
This is unfortunate since the Canadian example should prompt concern rather than blind imitation. Canada stands out among the OECD (Organization for Economic Co-operation and Development) countries for reducing deficits and debts through deep and permanent cuts to social programs and public services, at great cost to working families.
Government Debt Levels
In most OECD countries (with the major exception of Japan) government debt levels stabilized or fell as a share of GDP from highs in the mid to late 1990s until the start of the Great Recession in 2008. The basic drivers of debt reduction are well known. Debt will shrink if the economy grows faster than interest on the accumulated debt, and/or if deficits (revenues less expenditures) shrink due to spending cuts or tax increases.
From a labour and progressive perspective, the desirable approach to debt reduction is to maintain strong economic growth at low real interest rates and, if necessary, to raise taxes in a fair way to pay for the needed maintenance and expansion of programs. For most OECD countries, debts stabilized from the mid to late 1990s without major overall spending cuts as economies recovered from the downturn of the early 1990s, and as interest rates fell from very high levels (though not by nearly as much as they should have done in the Euro area).
For the OECD area as a whole, gross government debt as a share of GDP increased very slightly from a peak of 72% in 1998 to 73.1% in 2007, driven mainly by much higher debt in Japan. For the Euro area, debt shrank very significantly from 80% to 70.9% of GDP over the same period, and the U.S. debt also fell by 10 percentage points of GDP from its peak in 1993 through 2007.
At one level, Paul Martin's reputation as a deficit and debt slayer is well deserved. As Canada's Minister of Finance, he (together with like-minded provincial governments) presided over a huge reduction in Canada's gross debt, from a well-above average of 101.7% of GDP at its peak in 1996 to a well-below average of just 65% in 2007. This was one of the most sweeping fiscal consolidations in the OECD, and certainly the largest of the G7 countries. A mixed bag of small countries also saw major debt reductions over roughly the same period – Australia, Finland, Belgium, Denmark, the Netherlands, New Zealand and Sweden.
Government Spending Cuts
Death of Social Programs
Martin and others argue that Canada was in such a fiscal mess in the mid 1990s that there was no alternative to deep cuts. However, as argued at the time by the labour movement and leading Canadian macro-economists such as Lars Osberg and Pierre Fortin (both past Presidents of the Canadian Economics Association), rising debt was not the result of over-spending but of a very deep recession, 1989 to 1991, exacerbated by the exceptionally high real interest rates inflicted by Bank of Canada governor John Crow in his search for the holy grail of zero inflation.
The cyclically adjusted budget balance in the mid 1990s was the same as the OECD average (4.6% of GDP in 1995), and below that in the Euro area. Canada could, like other countries, have made much more modest fiscal adjustments to gradually return to balanced budgets as the economy improved. Taxes in the mid 1990s were a bit lower than the European average and could have been raised at least in line with U.S. taxes under Clinton. Canada had no real trouble financing government borrowing which was and is overwhelmingly denominated in Canadian dollars.
A key feature of Canada's deficit wars was the deliberate cultivation of fear. As documented by Canadian journalist Linda McQuaig in her book Shooting the Hippo, the media and officials fanned totally groundless fears of a debt default and even resorted to talking down Canada's debt standing in influential international circles such as the Wall Street Journal editorial board to create a sense of crisis.
The macro-economic consequences of Canada's huge fiscal retrenchment were limited by a shift to easier monetary policy, and a significant depreciation of the Canadian against the U.S. dollar. Canada grew somewhat faster than the U.S. and most of Europe from the early 1990s to 2000 despite fiscal restraint. But unemployment was very slow to decline, falling from 11.2% in 1992 to a still very high 8.7% in 2000. Average real hourly and weekly wages stood still over this entire period, under-scoring how far the economy fell short of its potential. For working Canadians, the 1990s were experienced as a lost decade.
As Paul Martin argues, Canada's experience holds lessons for others. The key lessons are that deep fiscal restraint is hugely damaging to the well-being of working families, and that better alternatives exist.
Andrew Jackson is a Research Professor in the Institute of Political Economy at Carleton University, a Research Associate with the Canadian Centre for Policy Alternatives, and a Fellow with the School of Policy Studies at Queen's University. He has written numerous articles for popular and academic publications, and is the author of Work and Labour in Canada: Critical Issues, published by Canadian Scholars Press (2005).
This article appeared on the Global Labour Column website.