Canada and many other sovereign governments all around the world currently face a huge dilemma. That is how to best go about balancing the federal government budget, while doing minimal damage to the nascent economic recovery now under way? In Canada, this is a question we dealt with very successfully in the mid 1990s. And now thanks to overspending and overzealous tax cuts by our allegedly conservative government, we will soon need to face again.

Source:Public Accounts of Canada Archives and Parliament of Canada

In the early 1990s, despite many years of growing economic output and much talk of fiscal restraint, Canada under Brian Mulroney’s Tory government was still running federal deficits in the area of 40 billion dollars a year at the end of its time in office. The Liberal Party were elected in late 1993 and within 3 years, had balanced the books. Over the next 14 years or so, the accumulated national debt was paid down by approximately one third from approximately 600 billion to approximately 400 billion dollars. The government was running large surpluses and this augured well for future debt and tax reduction.

How was it that the tag team of Jean Chretien as PM and Paul Martin as Finance Minister performed the magical and highly desirable feat of balancing the budget? This is where we get back to an inescapable fact about balancing any budget. If we are running a deficit of any kind in any endeavor, we have three basic choices we can take to return things to balance where revenues match expenses, and ideally surpass them resulting in a surplus. Surpluses are desirable. Deficits are undesirable.

The inescapable 3 choices for balancing the books are: 1) reduce spending, 2) increase revenue, 3) use a combination of reduced spending and increased revenue. Now some people would say we can grow our way out of a deficit, but that really is the same as increasing revenues so really these are our only three choices.

Though former Canadian PM Brian Mulroney and his Finance Minister Michael Wilson never did succeed in slaying the deficit monster, they did enact one fundamental policy that helped future governments balance the books. That was to enact the GST or Goods and Services Tax, a broadly based tax that is very difficult if not impossible to evade, as opposed to income taxes for example, which are much easier to evade. The GST provided a steady and growing source of income to help cover the Federal government’s many obligations and spending priorities. Through a combination of reduced departmental spending and a growing economy, Chretien/Martin were able to balance the books within three years. And it was a good thing they did. Prior to their efforts, Canada was well on its’ way to becoming financial roadkill and having to go hat in hand to the IMF as New Zealand did in the mid 1980s. New Zealand nearly went bankrupt and through their experience with the IMF, finally got its finances in order and back to a sustainable footing. There was pain to be sure, but at the end of it all, New Zealand ended up being much better positioned to operate in today’s global economy.

Canada made huge financial headway once the books were balanced. As mentioned earlier, a substantial amount of our accumulated national debt was paid down over the 14 or so years we ran surpluses. This is a good thing. If you were an individual with a huge operating deficit and large accumulated debt, common sense tells you that you would need to cut your spending to an amount substantially less than your revenues, and to begin paying down your debt. Facing a large debt, you could also declare bankruptcy of course, but that leads to many undesirable consequences such as a poor credit rating, social shame,  and loss of certain priviliges.

One thing that Paul Martin as Liberal Finance Minister always did was to leave a large Safety Margin in his forecasts. That is rather than make forecasts based on the most optimistic assumptions, he typically did the opposite and made forecasts that relied on pessimistic assumptions. The result was that actual surpluses were typically much larger than forecast, enabling a more aggressive paydown of the national debt and to deliver some tax relief as well.

The notion of underestimating expected revenues and overestimating spending or expenses is the very essence of conservative accounting principles. By that measure and by the measure of living within government means, Paul Martin was indeed a very conservative Finance Minister.

This brings us to our current “conservative” government with Stephen Harper as PM and Jim Flaherty as Finance Minister. The first few years of their time in power was largely good at least as far as surplus vs. deficits went. They continued to run fairly large surpluses and to pay down the debt. Then two things happened that fundamentally changed things. Those two things were 1) the Economic Meltdown of 2008 which substantially reduced government revenues and 2) the proposed Coalition of the Liberal NDP and Bloq Quebecois parties in early 2009 that resulted in Stephen Harper having a near death political experience.  Faced with the potential loss of political power, Harper the Fiscal Conservative became Harper the Overspender.

During the current government’s time in power they have made substantial changes that have lowered tax revenues and increased spending. None of those changes was more controversial than the gradual reduction of the GST from seven percent down to five percent in two successive one percent reductions. The net result to the average Canadian of those changes is minimal, but the reduction in government revenues was susbstantial. Coupling that permanent reduction in revenue with the drastic reduction in revenues resulting from the Economic Meltdown of 2008,  and the increased “stimulus spending” by the government has put us back on an unsustainable path of large deficits.

How ironic it is that the Conservative Party of Canada has put us back onto an unsustainable financial situation after the Liberal Party had put us back on the path of surpluses and paying down of debt. When I last checked, living within our means and paying down debt were considered conservative principles. Of course nothing matters more to many politicians than being in power, and faced with his own imminent political death, Harper proved to be lacking in that one paramount conservative economic principle of  living within our means. Large deficits are being run and the accumulated debt is once again increasing. That is not conservative and it does not augur well for the future of this country.

The best way for the current government to balance the books is through a combination of increased taxation and reduced spending. To start with, push the GST back up by one percent to six percent. Next step is to have a government wide review of spending with an eye toward substantial cost cutting. There will be some pain. That much is sure, but staying on the current path of unsustainble deficit spending is not a good thing. Anybody who tells you the opposite is either uninformed on this topic, or lying.

Let’s hope that Harper and his cronies can get back to the necessary principle of living within our means, either that or we can get elect a new government that does.  Recent statements by the Liberal Party are not much more encouraging on this issue. Hopefully the Liberals can remember the centrist policies and conservative economics that got them elected so many times in the 90s and early 2000s. I hate to say it, but I am not encouraged by the current statements of any of the major parties on this vital issue.

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