How we really beat the deficit: or, revisionism revisited

Andrew Coyne on why spending cuts played a bigger role than economic growth

Once again my colleague John Geddes has written a sensible, sober reminder that not all is as we imagine it to be, that things are not as simple as they appear. And once again it falls to me to point out that, actually, they are.

Last time out, John convincingly demonstrated that cutting spending is not as easy as certain ideologues would have you believe. Except, as I later showed, it is in fact quite easy.

This time, John’s point is not that spending can’t be cut, but that it wasn’t cut. Or not as much as people say. Contrary to the received wisdom, much repeated these days by our admirers in other countries, that Canada balanced its books in the late 1990s through deep spending cuts, John argues that in fact economic growth did most of the job. To be sure, “spending was restrained,” but “by far the main reason the red ink evaporated… is that the Canadian economy grew smartly year after year during that period, and tax revenues more than kept pace.”

“The real history of the Canadian fiscal reversal,” he summarizes, “is that firm but hardly harsh spending restraint proved sufficient because the economy cooperated by expanding steadily and rendering up taxes.”

Okay. But this formula — moderate restraint, coupled with steady growth and rising revenues — why wasn’t it tried before? Why did we wait until the mid-1990s to apply it, after twenty years of deficits? Answer: it was tried. That was exactly the approach used by the Mulroney government — the one that left office with the deficit still at $39-billion, or 5.3% of GDP.

If “firm but hardly harsh” restraint plus a strong economy were the ticket, it should certainly have been sufficient in Mulroney’s case. Indeed, the economy grew faster in the first five years of Mulroney’s government than it did in the same period under Jean Chretien. From 1985 through 1989, real growth averaged 3.8% per year; from 1994 through 1998, it was 3.6%.

Morever, revenues grew even faster than the economy under Mulroney: from 16.2% of GDP in 1985 to 17.6% by 1990. In Mulroney’s first five years, revenues grew by one-third after inflation. In Chretien’s first five years, real revenues grew by only one-quarter.

And yet by year five the Chretien government was running surpluses. In fact, they were doing so by year four. By contrast, after five years the Mulroney government had only reduced the deficit to 4.5% of GDP, the lowest it would get, before the 1990-91 recession drove it higher again.

Well, we know why that was, right? The Mulroney government spent like sailors. Or certainly didn’t cut spending. Actually, they did: from 19% of GDP when it took office to 15.9% of GDP in year five — the lowest it had been since 1970. Real per capita spending — my preferred measure — was held more or less level throughout the period. By the standards of the day — by the standards of just about any day — that counts as restraint: not harsh, perhaps, but firm.

And yet they failed. Why? Because the deficit, by then, was no longer about spending and revenues. It was about interest. Muroney actually ran small operating surpluses from his third year in office on. But these were drowned in a sea of debt service costs. After a decade of deficits, the debt had grown so large relative to the economy that whatever restraint was imposed could be instantly undone with every uptick in interest rates. And had the incoming Chretien government persisted in the same gradualist strategy — as it vowed it would, and as it did in its first budget — it would have met the same fate.

What made the difference, then? Why did Chretien succeed where Mulroney failed? Because, after the shock of the 1995 Mexican peso crisis, and the glimpse it provided of the truly ruinous debt spiral toward which we were headed, they abandoned gradualism. The only way to beat the remorseless arithmetic of compound interest, they realized, was to make deep, quick cuts in the deficit — so deep and so quick as to get the rate of growth in debt below the rate of growth in the economy, and turn the debt spiral in reverse. And the only way to do that was to make deep cuts in spending.

How deep? From $122-billion in the year they took office, and $123-billion after their first budget, spending was slashed over the next two years by $12-billion. Even as late as fiscal 2000, program spending remained below $120-billion. Adjusting for inflation and population growth, spending was cut by nearly 20%, and held there for another three years. That’s restraint. And that — not economic growth — was the key to their success.




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How we really beat the deficit: or, revisionism revisited

  1. A valiant defence of spending cuts, but you’re neglecting everything else.  Free trade kicking in, oil price rises, and the lowering of interest rates to tame inflation.  It all helps.

    On edit: I should have added that this is the exact wrong time for austerity. Austerity and protectionism prolonged the Dirty Thirties.

    • I agree with most of what you say. But interest rates are raised to tame inflation and lowered to spur economic growth using Inflation Targeting implemented by central banks since the early 1980s. (The US has abandoned that monetary policy for Quantitative Easing which takes a long-term view of inflation instead of keeping it on a short leash with IT.)  

      In fact, Inflation Targeting raised interest rates to absurd levels in the early 1980s and early 1990s to manufacture the massive recessions at those times. The high interest rates also caused most of deficit due to the high debt-servicing costs. (This is the most significant factor in the Liberals tackling the deficit — lowering interest rates. Coyne makes no mention of it in his article.)

      Also people should not confuse protectionism with dangerous free-trade deals being made with developing nations which export manufacturing plants and import poverty. The “emerging markets” free-marketeers talk about are non-existent. Workers in those countries don’t make enough to buy the products they are manufacturing.  

      • Our deficit at the time wasn’t caused by interest rates,  and Liberals didn’t lower interest rates. Plus there is a major difference to economies between 1% and 20% rates. 

        20% may tame inflation, but 1% also means no investment. We need a happy medium.

        It’s a global world, and we have to trade globally….that means no protectionism.  Goods and services have to flow freely around the world.

        Countries will use whatever advantage they have…and plentiful cheap labour is one…to get ahead.

        We do indeed have emerging markets…and that’s where we should be concentrating our efforts….cheap products from those countries help both them and us.

        • There are no “emerging markets.” It’s just more free-market flim-flam. Developing countries have very low GDP-per-capita and very high gaps between the rich and the poor (Gini index.) The workers are poor and exploited like we were in the 19th century. Free trade with them simply equalizes living standards downwards in developed countries while they remain stagnant in developing ones. Only the very rich in both countries make a lot of easy money out of the deal.

          Of course that is all in the short term. In the long term the tremendous loss of wealth from developed nations fool enough to go full steam ahead with more disastrous free-market ideology will cause their economies to crash and burn and so will the stock markets. 

          This will also cause the economies in developing nations to collapse, which will be built around leeching money from developed nations. 

          The wealth of the first-world nations was created with centrist economics in the post-war era. And that included protection from cheap labor in developing countries. 30 years of free-market ideology has cut Keynesian-era living standards and economic growth in half and culminated in a *second* global economic meltdown. More self-serving economics from plutocrats will further destroy living standards and economic growth and trigger yet another global economic collapse. 

          • Well, if you’re going to argue ideology instead of economics, there isn’t much point in continuing this discussion.

          • I am supporting my argument with numerous facts. Historically, centrist, Keynesian, mixed-market economics have been proven superior to free-market economics. This is also the case presently in northern Europe. You are simply making theoretical claims based on free-market ideology without any supporting evidence. Both the left-wing and right-wing extremes of communism and economic libetarianism have been shown to be colossal failures. How many more global economic meltdowns will it take before you start considering ideas outside of your belief system?

          • @facebook-630635489:disqus 

            I work in economics…and I’m quite familiar with how ideology can twist it to suit a pre-determined conclusion.

            I was unaware I was advocating for any particular system…all of them are obsolete, including yours. I am talking about current reality.

          • Emily’s right on this one. (Why am I saying that twice in one week? It feels weird.) 

            Ron, you actually think the current reckless QE being carried out by the Fed is a “more balanced approach”? It’s risky and potentially destructive is what it is. You’ve also trotted out the tired old argument that Volcker and Crowe caused the recessions of the early 80s (Volcker) and early 90s (Crowe). Both were global recessions, and the monetary tightening of both Volcker and Crowe were necessary after years of loose money policies that let inflation get out of hand. 

            Bringing down inflation is necessarily painful. There is no shortcut. And when the current loose money policies trigger a new bout of inflation we’ll learn those lessons all over again. 

          • “I work in economics…I was unaware I was advocating for any particular system…all of them are obsolete, including yours.” No offense, but I find that absurd. For one, the Keynesian mixed-market system is not an ideology, it’s knowledge-based. It’s like scientific knowledge, which evolves over time. Like Keynes is purported to have said, “When the facts change, I change my opinion.” Second, the global economic collapse was caused by flaky free-market banking deregulation. It was a repeat of the Savings & Loan fiasco, but on a much bigger scale. So our current economic circumstance are not systemic to the market system itself.Third, we are facing economic circumstances similar to what we had in the past. We may be in a never-ending recession like the 1930s. After WW2, first-world nations had 100% debt/GDP. In the Keynesian era (1945-1973,) the economic turmoil was turned around and it produced a 30 year period of exception economic growth, unprecedented living standards and debt was paid down to 17% debt/GDP in Canada. If one looks to economic history, free-market ideology crashed-and-burned twice. The Keynesian system ran into high inflation in the 1970s due to oil-supply shocks and wage-push inflation. That’s when the free-marketeers came back into fashion and produced the mess we are currently in. The mixed-market system is also doing very well in northern Europe at present — producing the strongest economies on the planet. (Canada is actually #10/17 despite the rhetoric from Harper.)

          • “Ron, you actually think the current reckless QE being carried out by the Fed is a “more balanced approach”? It’s risky and potentially destructive is what it is.”

            One must first remember that after 30 years of corporate downsizing, living standards are half of what they were in the 1970s. So aggregate demand is not strong enough to sustain the high inflation we had back then. Second the US economy is still in a deep recession with a sputtering recovery. Therefore the inflationary pressures are simply not there to cause any problems. The Americans have to worry more about an double-dip recession than sustained high inflation. The US Fed is not the central bank of a banana republic. They know what they’re doing.

            “You’ve also trotted out the tired old argument that Volcker and Crowe caused the recessions of the early 80s (Volcker) and early 90s (Crowe). Both were global recessions, and the monetary tightening of both Volcker and Crowe were necessary ”

            They were global recessions caused by the extremely high interest rates set by the US Fed to tackle inflation. The high cost of money during this period created most of the government debt we have today. So whether or not Inflation Targeting was a success remains to be seen, but it certainly had a number of side-effects including bankrupting third-world nations.

            “Bringing down inflation is necessarily painful. There is no shortcut. And when the current loose money policies trigger a new bout of inflation we’ll learn those lessons all over again.”

            Inflation Targeting means the people take the pain while the rich make free-money on high-yield government bonds. Any policy that creates as much economic turmoil as IT did cannot really be said to be good economic policy. We obviously need to try a different approach. I think governments should cooperate more with the central banks in fighting inflation. A variable rate value-added tax could cool down an overheating economy and only penalize current consumers not people whose mortgages come up for renewal when interest rates are high. Labor flexibility is also required to prevent wage-push inflation. The wealthiest members of society who make the most easy money from high interest rates also need to pay higher taxes to ensure government debt is not growing. 

            In short we can’t go back to IT alone because it will double our current debt problems and cause the economy to collapse in anther economic meltdown.

          • “ZZZZZZZZZZzzzzzzzzzzzzz”
            Sorry you find the facts tiresome. It must take a lot of effort ignoring so many of them to maintain your belief system.

          • @facebook-630635489:disqus 

            ZZZZZZZZZZzzzzzzzzzzzzz

          • @facebook-630635489:disqus 

            I don’t have a ‘belief system’….you do, and you can’t get beyond it…which is why I ended this discussion on straw men.

  2. Adjusting for inflation and population growth, spending was cut by nearly 20%, and held there for another three years.

    How much is that cut if you DON’T adjust for inflation and population growth?  ‘Cause I think that most people on the right advocating spending cuts are advocating ABSOLUTE spending cuts, not cuts which take in to account inflation and population growth.

    Also, compared to the “7 dollars in cuts for every dollar in new revenue” and “the Canadians laid off 25% of their government workforce back in the 90s” rhetoric that Geddes was addressing in his piece, even a 20% cut which includes adjustments for population growth and inflation seems kinda small.

    • It was a 10% cut in nominal terms. But a 20% cut in real dollars per citizen is hardly trivial. It’s the deepest, most sustained cuts in spending we’ve seen, outisde of postwar demobilization, in our history.

      • Thanks!

        I agree that it was by no means trivial, but still.  Rhetorically, a 10% cut in spending in nominal terms isn’t exactly how the foreign press is making what we did SOUND, is it?  They’re making it sound as though Chretien and Martin ruthlessly slashed and burned their way through government spending (because there was no other choice) but even a 20% cut in real dollars per citizen is hardly slashing and burning.  Plus, let’s no forget that there was an entire political movement that felt that the Liberals weren’t doing enough.  I wouldn’t say that the Liberal deficit-fighting path was the “middle of the road” exactly, but it was a more moderate path than some were  advocating that we needed.

        Plus, we raised taxes some too right?  Only short-term for most of them, and the Liberals were cutting taxes again by 2000 I believe, but they didn’t do ALL their deficit cutting through spending cuts the way some in the U.S. are suggesting they should do down south, did they?  The GST alone was a pretty big factor, wasn’t it?  ‘Cause I think many right-wing political pundits in the States who like to point to us as an example, and say “See?  Look at how the Canadians slashed spending to get them out of their difficulties when they lost their AAA rating” conveniently leave out the part about the 7% VAT introduced a couple of years before the Liberals came to power, and how the Liberals realized that cutting it (as promised) would have been idiotic, so they went back on their promise and kept the VAT, which turned out to be a good idea!

    • Also don’t forget the U.I. surplus’ of the day added to the ability to reduce the deficit.

  3. Well, there is another way to beat the “to beat the remorseless arithmetic of compound interest”, that being: stop issuing bonds with compound interest.  Use simple interest, instead, for public works.  

    • Unless the stocks are in freefall you probably won’t sell many of those.

      • The situation allowing compound interest exists because of government policy.  The road to other out comes is, therefore, via government policy.  

        You may, for whatever reasons, prefer private control over the creation of new money, but are you really prepared to sacrifice every service of our society has seen fit to put in place just so that finance can have it’s pound of flesh?  Is there really no other way than your scenario of being hostage to the interests of the market?

        • If only it were that simple. Money markets are international. Try eliminating compound interest in Canada and watch foreign investment flee. Canadian investment too, for that matter.

          • Power is won for a time.  Power won is broken.  

            Or, you can sit around waiting for your death by banker.  The choice is yours. 

          • Stop borrowing money. Then what the banker does is irrelevant.

    • You are hilariously confused. 

      Government bonds do pay simple interest – thus the regular cheques that go out to bond holders. People who are buying bonds are generally looking for a steady income stream. If they want long term capital growth they will re-invest interest payments, speculate using zero-coupon bonds, or look at other investment opportunities.

      The issue Andrew was addressing was that when you are borrowing money to pay interest to old creditors, you are at the mercy of compounding math. If you’re not a government we call this behaviour a Ponzi scheme.

      Your argument is that of an ignorant and innumerate NDPer, not anyone with an understanding of the actual problem being discussed.

    • You do understand what compound interest means, don’t you.

      From a borrower’s point of view it means that you are borrowing money to pay the interest charges. The interest charges increase every time you do it.

      The solution is to cut costs and not borrow.

      • No, the solution is to determine what is making the previously affordable now unaffordable (why is the money not coming in? Why are prices going up?).  The solution is to look at what choices people are making based upon the commonly held read of the land (where has the money gone & why did it go there?).  

        Borrowing has an important role to play in our society, as it is a recognition of value created or soon to be created.  My beef is with how it has been established and under what vehicles it has been vested.  I am not saying that it was done poorly (and at the same time I am saying just that) in light of the conceptual/axiomatic framework by which the active participants crafted the architecture of the system.  I am saying that the architecture of the system has an inherent breach of trust (fraud) as a result of the active participants attempting to protect their assets at the expense of the assets of non-active participants (to whom the active participants have a fiduciary duty).  

        In other words, we are reaping the fruits of the Glorious Revolution of 1688 and the founding of the Bank of England upon the Dutch model.  It was wrong then.  It’s character is, as well as that of it’s daughter banks, unchanged.  Therefore, it is still wrong now.

      • I know what compound interest is and I also understand the math involved in computing interests charges.  I am additionally aware of its pervasive presence in and effect on the human condition at this time and historically.  

        What it “means” is quite a different matter. It is not a merely a case of knowing or not knowing a dictionary definition. The meaning of compound interest is a manifold interplay of philosophy, science, sociology, theology against the fearful lusts of the instinctual man.  

        • It matters not whether the bonds you issue are compound interest bonds.  It matters entirely whether you keep borrowing to pay back the principal plus interest you have already borrowed.

          Because if you do keep on borrowing, then you are effectively paying compound interest anyways, even if none of the bonds were compound-interest bonds.

  4. Put up a poll. see what version wins.
    This coming from someone who seemingly swallows the story
    about wily ferocious poor people forcing tentative whinging non-banks
    into giving out “liars’ loans”. Bah. And humbug too.

  5. It all boils down to this:  The government of the day had to act firmly and decisively.  It made choices; most were unpopular with the provinces, the unions, the special interests, corporations, so called tax payers associations and so on so forth; but choices were made for the good of the country!  I am afraid the current government will continue to make choices for good of the Harper conservatives!

    • The cuts were deep and real, but they were measured. There was a plan. Marcel Massé was key in steering the political choices, chairing the program review. His work will be completely forgotten, probably is already. Lower interest rates were also key, as they had been in building up the debt in the late-seventies, early eighties.  Old woman going on her memory here, but Wilson in 84-85 use to say that 40 cents, maybe a bit more, of every dollar in revenue was to service the debt. Did we not have a BoC of 22 % in the early 80s – not only a record, but an anomaly when you look at interest rates over time.

      There was strong political will in those Chrétien years – not surprising with JC as PM. Tête dure…

      • Nonsense. The cuts meant that people waited three years for medical procedures.

    • “Choices were made for the good of the country” ->It raped the provinces and municipalities of needed revenue! For example: healthcare transfers. 

      Even under the duress created by the structure of the bloated waste by the federal tax whores, the province of Alberta was demonized by the feds for trying something different with healthcare (this after massive, debilitating cuts!) . This was, then, used by the Liberals for political advantage. They created a system where starving provincial governments were played off one another with the bogeyman of the US always available as a trump card.

      If Paul Martin had an ounce of humility, and wasn’t such a tunnel-visioned Ottawa creature, then, in, at least, one of his media appearances he would pause before taking credit for his ‘visionary’ actions. He would say, “Hey, I would like to thank the citizens/taxpayers of my country that were failed by the federal branch of government; this failure is what forced me to make significant cuts that demanded ALL of the sacrifice by them – They deserve the credit”.

      • Ahhh Alberta…ever the victim.

        • Not the victim, but one of many the practical solutions  ;)

          • LOL I hope you’re not saying Alberta is or has the solution to this.

          • I am saying, “Don’t rob Peter to pay Paul”.

            I believe in our System of Government, but not as a purely vertical organization. Having 10 (maybe) unique areas of the nation should not be considered just some geographical decision; instead (perhaps by accident), the somewhat different systems can positively influence one another, and also support one another.

            I don’t think Alberta alone is the solution, but a valuable contributor to the nation, if the proper separation of power is respected

          • @TSYM:disqus 

            Nobody’s robbing anybody, but a document over a century out of date is no solution either.

  6. Strong political will to ensure their own survival – to fix the f**k ups they created, and feed the mouth of Quebec no matter what the cost

  7. For a second there I thought you were going to say that what really stopped the deficit was the difference in interest rates between the Mulroney era and the Chretien era…

    … cause then at least the numbers would have jived.

    • But THAT doesn’t fit the ideology….LOL

    • Favourable interest rates were not exclusive to Canada. Governments of all industrialised nations of the time had debt and deficits, and favourable interest rates.  Without the political will, they didn’t get the results that we got here in Canada from spending cuts and favourable interest rates and economic growth.

      The big difference I see between then and now is of course the global economic environment of today, but also the lack of political will and political knowledge of the workings of government that was present in the Chrétien era, with Massé and Chrétien himself at the top of the list.

      • The whole article just seems odd to me. He doesn’t actually say that economic growth didn’t help to balance the budget, just that it wasn’t the biggest factor. Then he goes on to great length to demonstrate how Mulroney and Chretien were pretty much doing the same thing, with a note on interests. Just when he’s about to unleash the kicker, I was sure he was going to say that the difference between the two eras was interest rate on the debt, because it did go from 14% in 1990 to 4 % in 1994.

        But then… no. Contrary to what Geddes says, what really helped the deficit is really big spending cuts, and to make it happen you have to give a little bit here and take a little bit there.

  8. We still have the municipal infrastructure deficits that were created by the offloading that was a direct result of Wilson/Martin cuts and freezes. Roads, sewers and sidewalks are replaced decades after their actual lifespan with the result that cities cost more to operate in a state of disrepair even though they have high taxes, because they supply real services but don’t have real tax powers.

  9. Thank you Andrew Coyne for pointing out what should be obvious to everyone and yet seemingly isn’t.

    Either the government of the day made massive cuts or it didn’t, but those wishing to object to Chretien/Martin’s handling of the economy seem to want to have it both ways, the most famous of which is the “downloading” argument that seems to ignore the responsibility of the provinces to get their own books in order too, which they certainly didn’t like given the free ride they were getting on healthcare costs, ie half of their overall budgets on average.

    Gradual cuts don’t work. You have to get ahead of the curve somehow, but once you are the recovery can be fairly quick given the right circumstances.

    Massive cuts during a world-wide recession however is NOT an example of the right circumstances.

    • Oh sure, we’ll just pile up debt until the recession is over. If the recession lasts 20 years like in Japan, we’ll just pile up the debt that long like they did. No harm at all. 

      It’s NEVER a bad time to cut debt. If the past decade of profligate spending increases by our federal government weren’t enough to rescue the economy, nothing is. The bullets have been fired. Let’s get the house in order. 

      • I never suggested any such ridiculous thing.

        Does the term “false dichotomy” mean anything to you?

        I’d say in this case and at this time the current government’s approach is somewhat sensible, though I’d argue they got themselves in this mess to begin with by riding too close to the line with the rate of their tax reductions and massive spending increases.

        As long as we have a debt there should always be space created in the tax base to be paying it down. The benefit in the long run is tremendous. It also ensures that if there is a down turn, the extra space can be used to buffer the economy rather than put us further in debt.

        That’s what Paul Martin left us, and what Harper frittered away.

        • OK. I read too many assumptions into your post. My bad. I do worry whenever I hear the sentiment expressed that “Now is not the time for austerity.” That might be true on some level, but what if the right time for austerity doesn’t come about for decades? We can’t get locked into this idea that austerity during recession is universally wrong. Universally painful, sure. But better than the alternative. 

          •  Don’t worry.  If we fail to make the time for austerity, austerity will make its own time for us.

  10. While good to note that growth alone is not enough to balance debt levels, and that any sort of spending cuts must account for the increase in the cost of debt, what you’ve provided in no way indicates that economic growth was not part of the successful debt reduction of the 1990′s. Growth alone may not be enough, but it was certainly part of it. Not only did revenues rise, but as the economy was growing, it was far able to withstand the withdrawal of the government spending, possibly even take advantage of the freed-up credit.

    Yet now, growth is slow to non-existent in most modern countries. Spending cuts on the scale of that of the 1990′s can’t be compensated for. Lenders already hurt for safe borrowers and have rushed to government bonds. Austerity in Europe has slowed growth, and has done little to make debts easier to repay – in several countries, it’s actually gotten harder (though the EU’s currency structure bares some of this blame). Debt reduction may not work on growth alone, but it doesn’t seem to work without it either.

  11. Actually, both John Geddes and Andrew Coyne are correct. The initial progress on the deficit was due mostly to spending cuts, as Andrew points out. Likely, it never would have been eliminated if not for the cuts of the mid-to-late 1990s. However, the surpluses and debt pay-down that followed the deficit were mostly due to our ability to devalue our dollar to take advantage of the seemingly insatiable US consumer market of the late 1990s and early 2000s. 

    Booming exports drove unemployment way down, and created an enormous EI fund surplus (about $50 billion), while huge stock market gains created a massive surplus in the public service pension plan (about $30 billion). That works out to about $80 billion, which accounts for the bulk of the debt pay-down we saw in those years. 

    Remember, the Liberals never targeted massive surpluses. In fact, in 1995, they never even targeted elimination of the deficit. Martin’s initial target in his watershed 1995 Budget was to reduce the deficit to 3% of GDP within three years, a target he vowed to meet “come hell or high water.” It was actually a surprise in 1998 when the government announced a small surplus. 

    Spending started to rise again in 2000, accelerating every year until it really took off under Martin’s minority government in 2004-05. Then Harper took over and kept his foot firmly on the accelerator, and even then the surplus never disappeared entirely until the crisis hit in late 2008. When you look at spending from 2000 to 2008, it becomes evident that the surpluses of those years from were not achieved through cuts, or from any form of fiscal discipline whatsoever. 

    On top of this, we could also mention the fact that in the Mulroney years, inflation was much higher, necessitating much high interest rates. This interest rates remained high during the punishing early 1990s recession when the BoC, under John Crowe, finally got serious about wrestling inflation to the ground. The Liberals, even though they couldn’t dump Crowe fast enough,  were the major beneficiaries of his war on inflation. Having killed off inflation expectations, interest rates – and the loonie – were on their way down by the time Crowe left, and they kept falling throughout the decade. 

    Some will turn around and blame Mulroney at this point for appointing Crowe as BoC governor in the first place. But that ignores the fact that the price stability and low interest rates we enjoyed throughout the rest of the 1990s and early 2000s were a result of Crowe’s monetary discipline earlier in the decade.

    • Way too long!  If you want to write full articles, set up a blog and link to it.  You should have just posted your second paragraph.  

      Your posts are most interesting when short length, grumpy in tone and determined to skewer.

      • Point well taken ColdStanding. You’re absolutely right. I need to put the rage back in the rants. 

        Speaking of skewering, I was going to address your whack-job proposal for monetary reform, which reads like a 1936 Social Credit campaign leaflet (I won’t even mention Paul Hellyer’s Canada Action Party pushing the same silly idea a decade ago) but that will have to wait for another day. I’m a little short on time right now. 

        Cheers. 

        • Your welcome. 

      • Actually, we should focus on the last sentence of his first paragraph.  the Liberals enjoyed a policy of low interest rates and a massively devalued currency to make every Canadian pay dearly for past government misdeeds.  The turnaround was “thanks to brave Chretien-Martin decision-making” but it was really thanks to 1990s Canada having our wealth evaporate to attack our awful balance sheet.  We paid back our foreign debt by giveaway pricing on our exports.

        • Ugh!!  I am so tired of pithy anecdotes of what happened.  Tell me why!!  How the landslide came down the mountain and what it did to things in its path is of some importance.  What is of vastly more importance is the terrain and other conditions which created the environment in which the landslide was ready to go, save the trigger event. 

          Canada took a haircut, to be sure, but why it did or had too or it was felt we had to is not at all a clear matter.  I have looked for answers, and have not been too fussy about who was giving them, that can cast some light upon the matter so that a reasonable policy position can be formed.  Not that I have any pretension to policy formation beyond my postings here.  It is my firm position that I must try to say something different, come what may in the opprobrium of others. 

          • Try to learn the difference between anecdote and history.

            Or, better, link history with current events: Greece & Spain & other PIIGS are in even more trouble precisely because they can NOT punish their citizenry and creditors by massive devaluation of their sovereign currency, as so many other nations have swindled their citizenry and creditors.  That option is unavailable to them.  So they have to come up with REAL austerity measures instead.

          • How, exactly, are the creditors being punished?  Did they not accept the contract & charge a fee for the risks involved?  They are on the loosing end of a trade/deal, yes, but wouldn’t you suppose that an investor would have done their due diligence?  Even if they didn’t, it is not as if the opportunity wasn’t available to them.  At some point if there is a failure causing default, it is not the role of the creditor to take the haircut?  Why else would they be charging a risk premium?  For a supposed advocate of individual responsibility, you display precious little faith in the ability of the investor class to exercise their purported forte. 

            Your animadversion is not founded in principle but misanthropy.  

          • CS, the comments have nested to the limit, I hope you see this reply…

            How, exactly, are the creditors being punished?  By currency devaluation perpetrated by the debtor?  Really?  Lend me ten thousand real dollars, have no choice but to accept my repayment next week  in Monopoly money and maybe it will become clearer how you have been punished.

            Darth Vader: Perhaps you think you’re being treated unfairly? 
            Lando: [after a pause; nervous tone] No. 

            Yes, interest has a way of “pricing in” the risk, as can be perfectly shown by the price Greece and other PIIGS have to pay on the bond markets these days.  But your logic (of saying it’s the lenders’ own fault for failing to conduct due diligence in predicting the debtor’s future likelihood to pull this dirty one-sided currency devaluation trick), while actually correct, has just proven how stupid it is to lend money to any government in control of its own currency; they just can’t be trusted.

            Those governments who swindle like this (many examp– uh, anecdotes), and in particular those who intended to do so all along (any US leader with a brain over the last several decades) deserve far more scorn than the duped lenders.

  12. One of the most important factors in eliminating the deficit of the early 1990s was lowering debt servicing costs. The Bank of Canada, using Inflation Targeting, raised interest rates to very high levels in the early 1990s to reel in inflation. (They did so at a more zealous pace than the US Fed, creating what Liberals referred to at the time as a “Made in Canada” recession.)

    When the inflation threat was over, the Bank of Canada began to lower interest rates to stimulate economic growth by the mid 1990s. This dramatically lowered debt-servicing costs and brought in higher revenues as the economy recovered. 

    One interesting note about the recessions and high deficits that occurred in the early 1980s and early 1990s compared to the 2008 “Great Recession”: the first two were caused by central banks setting very high base interest rates to reel in inflation. During the recent recession interest rates have been near zero percent, meaning the government has saved an enormous amount of money in debt-servicing costs yet still produced a record deficit. 

    The two primary causes of government debt skyrocketing back up to WW2 levels over the past 30 years have been the high-interest Inflation Targeting policy of central banks and 30 years of continuous tax cuts that have only benefited the wealthiest in society. This is demonstrated most clearly in America.

    • No, the primary cause of government debt skyrocketing is the accounting error at the center of private banking.  Every policy initiative that you list has been an effort to compensate for the short falls on balance sheet as a result of the anti-supply of money to pay for interest charges.  Money is has been issued for the principle.  Money has not been issued for the interest charges.  Where has money for interest charges been coming from?  Looting.  Stealing from Peter to pay Paul. Beggaring the middle class.  Globalization.

    • You’re assuming we can keep interest rates low all the time with no negative consequences. In fact, we’ve done that for the past 15 years. And where did it get us? It got us an enormous stock market bubble, followed by an even more enormous real estate bubble, and unleashed a tsunami of financial destruction the likes of which we’ve never seen before. Do you not think lending rates should have been substantially higher during the boom years to prevent those bubbles from happening? Or do you actually believe in the free lunch of easy credit? 

  13. The initial progress on the deficit was mostly due to falling costs of servicing debt.  The federal numbers for the late ’80s/early ’90s show the public debt charges being held in check (and falling slightly) mainly on the strength of those falling costs.  Revenue growth wasn’t always that strong and spending growth frequently exceeded it.  Restrained spending growth kicked in for ’93-’94 (about 0.11%, and 0.76% the following year) before the two successive years of absolute reductions.  Revenue growth ticked up significantly in ’94-’95 and subsequent years.

    In ’95-’96 the government cut – in absolute terms – about $2.5B but the deficit reduced by $6.5B.  In ’96′-’97 the big cut was $9.5B but the deficit reduced by over $21B (the other $9.5B from revenue increase and $2B from falling debt costs).  (All numbers approximate.)

    The “massive cuts” (-1.93% and -7.88% in those two years as a fraction of prior year spending; those are not large numbers) simply weren’t that big compared to the difference made by revenue increases and falling debt costs.  And to the extent that cuts were offloaded to other levels of government, they weren’t really cuts that the federal government had to exert much effort to sustain.

    For those who criticize the Mulroney government for not cutting its way to a surplus, try to imaging cutting 28% to 44% of spending instead of a “massive” 10%.  That is what would have been needed.

    • Mulroney made much of the progress later claimed by the Liberals. But the Liberals still deserve much credit – most of the credit – for getting things in order. Marcel Masse’s program review was a perfect example of how top thinkers in government should go about things. Ditto for their work in making the CPP solvent again. Ditto for Lloyd Axworthy’s proposed EI reforms (ultimately not adopted). And yes, that IS the only time you will ever hear me praise Lloyd Axworthy. 

  14. Why are you crediting Chretien – or Martin?  It was very senior officials in the Finance department who told Martin as Finance Minister that Canada was far to far in the red and that interest charges would be killing them.  Both Martin and Chretien up to that time both wanted spending programs. And don’t forget, it was not the Federal taxpayer but as the Feds unloaded or underfunded programs the Provincial and municipal sectors that took the federal hits, not to mention ecco-techs and other regulatory people in federal employ. It was the usual cut the Indians but keep the chiefs.  

  15. Dearest M Coyne,

    The Grey & Purple Books of Mr Martin’s man (Nicholson) was the key + the Private Sector Pre-Consultations — the public was shown that they had but two choices a) be broke forever or b) do like the PC’s had tried to suggest (but they always backed off when put to the test … remember Solange ___? and the CPP?)

    The detaching of “strings” to the provincial transfers  (smaller $$ accepted by prov’s but w total autonomy) provided an easy program cut (+ the over-payment of UI/EI contributions + GST helped on the revenue side too)

    NB the cuts to provincial Transfers led to the Who-Does-What/Download cuts that are still plaguing cities & towns across Ont & Can.

    Your published solutions in 1990′s were just as simplistic then as the ones you criticize now — you did not present (as did no one else) a plan to reduce/recycle/refinance the Public Debt Charges.
    This huge Budget item MUST finally be addressed … here, in the USA, EuroZone, Japan …everywhere

    In his day, Mulroney got caught “short” in TbIlls when rates rose.

    Similarly Trudeau got caught (overborrowed, with a public addicted to the largesse the borrowing was subsidizing) when rates rose (to fight the worldwide inflation his/others menchevik policies had built based on baby-boom stats and stoked yrly even when the babyboom was clearly over) in late 70′s early 1980′s

    Ponder: Why is it more inflationary to print money, than to create exactly the same amount via bonds-at-interest? esp when there is no ammortization plan or sinking fund created WITH the borrowing to retire the principal?

    Rce
    416-819-7333

  16. Good point re: factoring in growth.  In terms of political will though, I wonder if any political party or Finance Minister who ran up a deficit ever successfully balanced the books.  I can think of several examples where deficits were ran up, or where a new party balanced the books, but it’d be interesting to see if the governing class of whatever level of government in Canada ever dealt with its own mess.

  17. Mulroney’s much maligned GST helped the Liberals cut the deficit. Politics is much like BINGO and tit’s, it’s a strickly money and numbers game.

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