Tuesday, October 19, 2010

How did Canada dig itself out of a debt hole?

in 1995 Canada was in a debt crisis as bad as Italy's today.  The government had been consuming 50% of the country's income, and debt had gone so high that the Wall St. Journal suggested that Canada had become "an honorary member of the Third World."  The editorial proved to be a wake up call, and Canada began reducing the size and scope of government.
• Paul Martin, the finance minister for the national Liberal Party, unveiled a budget in early 1995 that ... reduced program spending by 8.8% over two years ...and  federal government employment was reduced by 14%.
• While some taxes were raised (and, according to the authors, these worked against the recovery), spending cuts were 4 ½ times tax hikes. 
• Canada’s welfare system was dramatically modified, and despite accusations from the far left that the poor would suffer due to these changes, the percentage of welfare recipients fell in just a few short years from 10.7% of the population to 6.8% by 2000. 
• The tax structure was dramatically redesigned. Corporate tax rates were cut by nearly a third, taxes on corporate capital were abolished, and personal income and capital gains taxes were reduced. 
• The General Services Tax (basically a consumption tax or VAT) was instituted to pay for the tax cuts described above. 
As a result of these actions, and others, the federal budget was balanced within three years.


  1. The Canadian debt crisis was much longer than 3 years, but only Paul Martin had the vision to pull off the balanced budget.

    To prepare the country for the inevitable reduction in Federal spending took many years; ironically in Ontario it was left to the socialist NDP to cut government services- to the then socialist Premier Bob Rae.

  2. What are your thoughts on the argument by my friends on the right against implementing a VAT because it is TOO good at collecting revenue, and thus (so the argument goes) causes a further expansion of government, as opposed to a deficit reduction measure?