Lessons for U.S. from Canada's "basket case" moment
Finance officials bit their nails and nervously watched the clock. There were 30 minutes left in a bond auction aimed at funding the deficit and there was not a single bid.
Sounds like today's Italy or Greece?
No, this was Canada in 1994.
Bids eventually came in, but that close call, along with downgrades and the Wall Street Journal calling Canada "an honorary member of the Third World," helped the nation's people and politicians understand how scary its budget problem was.
Canadian debt shrank to 29 percent of gross domestic product in 2008-09, from a peak of 68 percent in 1995-96, and the budget was in the black for 11 consecutive years until the 2008-09 recession.
Canada's experience turned on its head the prevailing wisdom that spending promises were the easiest way to win elections. Politicians of all kinds and at all levels of government learned that austerity could win.
MORE SPENDING CUTS THAN TAX HIKES
The ratio of spending cuts to tax hikes was seven-to-one. Asked why, Chretien said simply: "There was more need on one side than the other."
That contrasts with proposals this year by President Barack Obama and the Democrats to have a much higher proportion of revenue increases in the deficit-tackling mix.
Canadian ministers were told how much they had to cut and then told to come back with a plan on how to do it. Cuts ranged from five percent to 65 percent of departmental budgets and included controversial cuts in transfers that help provinces pay for health and education, decisions that lengthened medical waiting lists for years to come.
After wrestling the deficit to the ground, Canada enjoyed what Crowley calls the payoff decade, outperforming the rest of the G7 on growth, job creation and inward investment. From 1997 to 2007, it averaged 3.3 percent economic growth. while U.S. growth averaged 2.9 percent.
The Canadian dollar weakened from around C$1.38 to the U.S. dollar at the time of the 1995 budget to almost C$1.62 in 2002, helping make Canada more competitive. But it has since roared back and now stands close to parity with the greenback.