Fiscal Responses and Future Challenges
Edited by John Wanna, Evert A. Lindquist and Jouke de Vries
Chapter 3: Canada’s reactive budget response to the global financial crisis: from resilience and brinksmanship to agility and innovation
As the early shocks of the global financial crisis moved to Canada in 2008, its budget system was on autopilot, largely concerned with domestic issues. It had been nearly 15 years since the budgetary system had been tested by major pressures. In the mid-1990s it was internal fiscal pressures – accelerating deficits and ballooning debt levels – that threatened to undermine the government’s fiscal framework and its financial credibility. The inability of the two Mulroney Conservative governments (1984 to 1993) to address the fiscal challenges had weakened the credibility of the Department of Finance whose regular annual five-year fiscal plans invariably forecast balanced budgets in the fifth year which were never achieved. Elected in 1993, the Chretien Liberal government failed miserably in its first budget to address the increasingly worsening fiscal situation. By summer 1994, with its credit rating falling and international pressure mounting, the Wall Street Journal labeled Canada ‘a third world country’ amid widespread rumors it was about to ‘hit the wall’ with the International Monetary Fund coming in to take over its fiscal policy. Canadian public attitudes coalesced around the need to reduce government deficits and debts. This, along with fears about how the Mexican peso crisis would affect the Canadian economy, led the government to introduce its unprecedented 1995 ‘Program Review’ budget. It restructured and eliminated programs, and significantly cut expenditures; program spending was reduced to 13.1 percent of gross domestic product (GDP), the lowest level since 1951.
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