Beware the Canadian fiscal model.

Author:Jackson, Andrew

Apparently former Canadian Finance Minister and Prime Minister Paul Martin is being tapped by the Europeans for advice on fiscal matters.

Former prime minister Paul Martin, finance minister in the 1990s when Canada's dangerously high federal deficit was tackled and then eliminated, said Thursday 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.' (O'Neil, 2010) Martin recently spoke to a Public Services Summit organised by the Guardian newspaper in the UK. The Guardian reported that he stressed the need to set and meet stringent deficit reduction targets while keeping the public on side. 'For his plans to work it was important to get economic commentators onside, which made the budget credible with the public ... Deficit elimination must be seen to be for people's well being, he said. They will not support arcane economic theory' (Guardian Public, 2010).

At one level, Paul Martin's reputation as a deficit and debt slayer is well-deserved. As Canada's Minister of Finance from 1993 to 2003 (followed by a short term of just over two years as Prime Minister) he implemented the most sweeping fiscal consolidation ever under-taken in the OECD (rivalled only by Finland over the same period). The total Canadian government fiscal balance (which includes provincial government balances) shifted by a dramatic 12 percentage points of GDP, from a deficit of 9.1 per cent of GDP in 1992 to a surplus of 2.9 per cent of GDP in 2000. Over the same period of economic recovery, the average OECD fiscal balance shifted by less than half as much, by 4.8 per cent of GDP. After 2000, Martin shifted the emphasis to tax cuts, and government spending stabilised at a new, much lower, level of GDP until 2008.

One key aspect of the Canadian experience was exclusive reliance on spending cuts to balance the books. Between 1992 and 2000, general government total outlays fell by a huge 12.2 per cent of GDP (from 53.3 per cent to 41.1 per cent) while total revenues stayed almost unchanged, falling very slightly from 44.2 per cent of GDP to 44.1 per cent. By contrast...

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