Paul Martin, the Deficit, and Debt: Taking Another Look
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By Jim Stanford
There is no doubt that Canada faced a serious fiscal situation when the Liberals were elected in 1993. There is no disagreement that the deficit had to be dramatically reduced or eliminated, and more importantly that the upward track in the federal debt burden had to be quickly arrested and reversed. And there is no doubt that, by these indicators, Canada has been a fiscal star among the group of industrialized countries since Paul Martin became Finance Minister. But it may well be that Mr. Martin's stellar reputation as a tough and prudent budgeter is not fully deserved. A broader second look at Canada's finances during the Martin era suggests that important errors may have been made on the road to the balanced budget, producing unnecessary but lasting social and economic harm.
Canada's total public deficits (federal and provincial) from 1991 through 1993 averaged 8 percent of GDP – twice the OECD average. However, by 1996 Canada's deficit was smaller than any other G7 economy but the U.S., and by the next year the deficit was history (beating other G7 economies to a balanced budget by one to three years).
At the same time, the return to fiscal balance during the late 1990s was experienced relatively broadly across the OECD. Indeed, a total of 18 OECD countries balanced their budgets late in the decade (and most of the others came within spitting distance of doing so), primarily because of the acceleration in global growth and a steep decline in global interest rates.
The one aspect of Canada's fiscal turnaround that is truly unique in the international comparison is in the severity in the cuts to program spending, which were much deeper than any other major industrialized country. General government program spending, measured as a share of GDP, declined by 10 percentage points in Canada between 1992 and 2002 while in the OECD as a whole, program spending stayed roughly constant as a share of GDP. Some countries restored fiscal balance with hardly any spending cuts at all – and in some cases, while actually increasing government spending.
Our analysis shows that Paul Martin could have overseen the quick elimination of the huge deficit which his government inherited, in line with his official timetable, yet without imposing a single dollar of nominal program spending reductions. The fact that so many other industrialized countries also eliminated deficits during the latter 1990s, most of them more gradually than Canada, and most without dramatic reductions in program expenditure, similarly supports the notion that real choices were available, while still accepting the general goal of deficit reduction. So Mr. Martin's decision to impose dramatic program spending reductions to attain a uniquely fast improvement in bottom-line fiscal balances must, therefore, have reflected priorities other than simply the desire to balance the budget.
As for the federal debt burden, fell by 26 points of GDP between 1995 and 2002, from 70.9 percent to 44.2 percent. Five-sixths of that decline was due to the expansion of GDP. one-sixth was due to the repayment of nominal debt, which declined by $50 billion during this time as a result of six consecutive federal surpluses. In other words, if Ottawa had simply balanced its books since 1997, instead of repaying $50 billion worth of debt, the federal debt ratio at the end of 2002 would have equalled 48.8 percent of GDP, instead of 44.2 percent. That would still qualify us as having the second-lowest debt ratio in the G7. If that $50 billion had been invested in repairing some of the damage that was done to public programs and infrastructure earlier in the 1990s, it would have made an incredible difference to the concrete quality of Canadians' lives.
Going forward, the federal government will face similar choices regarding the wisdom of discretionary repayment of its nominal debt. Mr. Martin has indicated that he would prefer to see the debt burden shrink to 25 percent of GDP. This will occur by 2012 if the government continues its official practice of allocating $3 billion annually to debt repayment (in practice, of course, Ottawa has allocated much more than this to debt repayment, in which case the 25 percent goal would be achieved sooner). If the government simply balanced its budget (rather than setting aside $3 billion annually for debt repayment), the 25 percent goal would be obtained in 2013 – a whole year later. Canadians should consider carefully whether these $3 billion annual repayments are genuinely “prudent,” or not. Which would they consider to be the more important, and prudent, act of government: say, a national public housing program which could help to eliminate homelessness (a generous federal contribution to which would be $3 billion per year), or making sure that our debt/GDP ratio declines to 25 percent by 2012 instead of 2013?
Since Mr. Martin's first budget in 1994, Ottawa has beaten its own bottom-line budget targets nine years in a row. This cumulative “overperformance” (actual balance versus budgeted balance) now equals a staggering $80 billion. It has become clear that there was nothing accidental about this overperformance: it was preordained by a set of artificial assumptions and practices all oriented toward making Ottawa's fiscal situation look worse than it actually was.
Instead of facilitating an honest debate among Canadians about how available resources should most effectively be allocated, and to what priorities, Finance officials expend more energy trying to convince Canadians that those resources are not even there. As a result, the only thing we now know for sure about official budget forecasts is that they are not intended to be accurate. This aspect of federal budget-making is perhaps Paul Martin's most dubious legacy as Finance Minister.
Instead of concluding that Mr. Martin is a hero for leading Canadians in an epic battle to eliminate the deficit (a battle which, after all, 18 OECD countries in total accomplished), perhaps we should be asking why he implemented such dramatic reductions in government programs that have been enduringly painful yet, in retrospect, were unnecessary. Our incoming Prime Minister might then be wreathed in a different aura indeed.
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@ November 30, 2003