Lessons from Canada

The United States is not the only country in the world who has, or is, facing fiscal problems. Our neighbor to the north faced some severe fiscal problems during the mid-1990s when they had high budget deficits and when the Mexican peso crisis seemed to make Canada the next focus of international worries. To help illuminate Canada's solution to their fiscal problems, the American Enterprise Institute and the Macdonald-Laurier Institute hosted an event featuring a panel of Canadian officials and later remarks by former Finance Minister and later Prime Minister of Canada Paul Martin.

The event was designed to showcase what Canada went through and what lessons can be learned to help the United States with our own fiscal problems. Canada's problems in the mid 1990's in some ways resemble ours: Canada ran deficits during good times, which grew larger during bad times, and their debt was spiraling out of control. Canada was downgraded and The Wall Street Journal referred to Canada as "an honorary member of the Third World." In addition, the Canadian government was spending a whopping 36 percent of its budget on interest on the debt, which was the largest single expenditure in the budget.

Prime Minister Martin said that coming in as the finance minister in 1993, he recognized the precarious situation Canada's finances were in. He feared that a financial crisis would strike somewhere in the world and spread to them and argued that had they not acted, the 1997 Asian financial crisis "would have done us in." Politicians recognized the need for a deficit reduction plan that everyone had to take part in. If too many sacred cows were left untouched, if some groups got a better deal, it would ruin the sense of shared sacrifice. At the same time, because of the severity of the cuts that were needed, politicians feared that they would not be re-elected if they went through with them. As the story goes, the cuts happened, and the voters rewarded lawmakers by re-electing them.

Martin argued that to sell deficit reduction to the public, it had to be justified more than in terms of pleasing the markets; rather, deficit reduction needed to be framed in terms of how it would improve citizens' everyday lives. For Martin, this was relatively easy because of the huge amount of interest spending that was crowding out other priorities in the budget.

In addition, he said that all interested parties needed to engage in the debate, describing televised roundtables where different interest groups would debate the relevant issues. The lesson from these roundtables for Canadian citizens was that tough choices needed to be made, but that there were no perfect solutions.

Prime Minister Martin added that having to do multiple rounds of deficit reduction was risky -- do it poorly the first time and it is harder to do the second time. This gives further credence to arguments that going big in a deficit reduction package increases the chances of success. He said that lawmakers have to be open about the scope of the problem and the shared sacrifice needed. He warned us on our fiscal cliff, noted that both parties ran away from Bowles-Simpson, and said that our deficit is a big problem that we have to address. Finally, he stated that as in Canada, if we do not work to address the problem before it got even worse, it would be harder to protect health-care spending and investments in our future.

Lawmakers would do well to take some of the advice that Prime Minister Martin laid out at this event.