Winnipeg: The Frontier Centre for Public Policy today released Canada’s Budget Triumph, a paper that describes how the Canadian government achieved fiscal balance in the 1990s without major tax increases. The paper shows that Canada returned to fiscal balance by making significant cuts to government spending levels. The study’s author, David R. Henderson, is an associate professor of economics in the Graduate School of Business and Public Policy at the Naval Postgraduate School in Monterey, California. Professor Henderson’s paper contains important policy lessons for governments around the world today, as many are struggling to eliminate large budget deficits without resorting to the introduction of major, economically harmful tax increases.
Key Findings From the Study Include:
- In 1993, Canada’s federal debt was equal to 67 per cent of the country’s GDP. Just 16 years later, Canada’s federal debt had fallen to only 29 per cent of GDP.
- For governments around the world facing similarly large levels of public debt today, the story of Canada’s budget triumph in the 1990s contains valuable policy lessons.
- Canada did not resort to major tax increases to eliminate its budget deficit and reduce public debt. Instead, Canada’s budget triumph was a result of reduced government spending and strong economic growth.
- Importantly, the Canadian government did not merely reduce the growth rate of government spending – the government cut absolute spending on many government programs in dollar terms.
- Canada’s deficit reduction efforts in the 1990s did include some tax increases – but these tax increases were relatively modest. In total, taxes were increased by about one dollar for every six or seven dollars worth of spending cuts.
- Throughout the austerity era, Canada experienced strong economic growth. The argument made by some Keynesian economists that big cuts in government spending will slow down an economy receives no support from Canada’s experience in the 1990s.
- Canada’s budget triumph shows that even very large budget deficits can be turned around through real cuts to government spending, with no major increases in taxes.
“We often think of Canada as a more-socialist and a higher tax country than the United States. So one might think that the Canadian government eliminated deficits in the 1990s with major increases in taxes. But that’s not what happened,” says the paper’s author, David R. Henderson.“So how did Canada do it? The main policy actions that the Canadian government took to shrink the deficit were real cuts to government spending. These weren’t just reductions in the growth rate of spending, a favourite trick of some politicians. These were cuts in absolute spending on many programs in dollar terms.” Professor Henderson argues that the story of Canada’s budget triumph contains important policy lessons for governments around the world today, including in the United States, who currently face budget pressures comparable to those Canada felt during the 1990s. “What we know is that if the political will is there and if the political incentives are right, the budget situation in the United States can be turned around with no major increases in taxes.”
About the Author
David R. Henderson is an associate professor of economics in the Graduate School of Business and Public Policy at the Naval Postgraduate School in Monterey, California. He is also a research fellow with the Hoover Institution at Stanford University. He was born and raised in Manitoba.
Download a copy of Canada’s Budget Triumph HERE.
For more information and to arrange an interview with the study's authors, media (only) should contact:
David R. Henderson