August 5, 2014 | by Janet Neilson Print

Canada used to be the butt of jokes when it came to economic freedom. A Wall Street Journal article declared the country an “honorary member of the third world” in the mid-1990s because of out-of-control debt and spending. But today, Canada’s economic performance leads the G8, and while fiscal governance has suffered following the 2008 global financial crisis, Canada is not plagued with the seemingly insurmountable problems that face some EU member nations and the United States.

In the early 1990s the federal debt was almost 70 percent of GDP and interest costs to service that out-of-control debt represented almost a third of federal revenue and over a quarter of federal expenditures. The Canada Pension Plan was unsustainable in the face of an aging population. Through the Thatcher/Reagan years, a Progressive Conservative government did little to curb spending and was nearly eliminated from Parliament when the center-left Liberal Party led by Jean Chrétien came to power in 1993.

What changed? Prevailing ideas. As the crisis loomed and debt-rating agencies began reevaluating Canada, the work of think tanks and business leaders that had pushed for sounder fiscal management by Canada’s government began to pay off. Public opinion swayed, and political battles became moot. Chrétien may have been a social democrat, but no party that wanted to stay in power could do so without reforms.

Between 1993 and 2003, Canada’s federal spending fell every year. The most dramatic changes were enacted through Finance Minister Paul Martin’s 1995 federal budget, which slashed federal program spending by 9.7 percent (exceeding a target of 8.8 percent in cuts), reducing the number of federal public servants by 14 percent and cutting individual ministries  as much as 40 percent over two years. These were not cuts to projected growth in spending, but real reductions in the size of government.

All programs, without exception, were subject to “Program Review,” which examined whether the federal government ought to be doing the job each program tried to do, as well as the efficiency and effectiveness with which it did that job. Ministers were required to rate their departments on these criteria: (1) serving the public interest; (2) necessity of government involvement; (3) appropriate federal role; (4) scope for public sector/private sector partnerships; (5) scope for increased efficiency, and; (6) affordability.

In addition to these reforms, control of some programs was decentralized by allocating them to the provinces. Canada’s federal pension plan was also reformed to be fully funded.

The economy grew as shrinking government freed up room for development, causing revenues to grow and allowing tax cuts, which enabled further economic growth. It was, as the Macdonald-Laurier Institute’s Brian Lee Crowley declared, “a delicious virtuous circle.”

Canada is also more welcoming to the world than our southern neighbour. Canada accepts more skilled immigrants each year than the United States, in spite of its much smaller population, and it doesn’t tie them to specific jobs.  No major party opposes immigration.

Canada’s banking system has been rated the world’s soundest for six years running. It’s not that regulation is more conservative; it’s that banks have been allowed to act as they consider most prudent. As in the Great Depression, Canada experienced no bank failures during the recent economic crisis.

Challenges remain. Under Prime Minister Stephen Harper’s Conservative government, the size of the federal public service has grown dramatically, international investment decisions have been blocked, and politically important agricultural trade restrictions continue to be supported. In spite of polls suggesting that the public continued to oppose a budget deficit, the government issued a stimulus package, “Canada’s Economic Action Plan,” which plunged the country back into consecutive deficits that continue to this day. And the provinces have problems of their own.

In spite of the Conservative political brass’s best efforts to quell small-government advocates’ accusations of reckless spending, Canadians are unwilling to accept deficits with no plan to balance the budget. Slow and reserved though it may be compared to the reforms of the Chrétien Liberals, a steady trudge toward a balanced budget is underway. Canada continues to perform well economically, with some of the lowest welfare expenditures as a percentage of GDP in the developed world, a stable banking system, and, in spite of the growth, a government as a percentage of GDP that’s comparable to its size in the 1920s.

The battle for restrained government is a battle not of politics but of ideas. Canada’s past victories give all countries lessons to draw from in the future.

Janet Neilson portrait
Janet Neilson is a director and a founder of the Institute for Liberal Studies. She is also a research assistant to Scott Reid in the House of Commons. She has worked as the Quality Management Assistant at the Department of National Defence, a health policy analyst at the Mackinac Center for Public Policy, and a teaching assistant at the University of Windsor. Neilson has a Bachelor of Commerce in Honours Business Administration, a Bachelor of Arts in Honours Economics, and a Master of Arts in International Affairs. Learn More about Janet Neilson >