Canada's Budget Triumph

Abstract

In the mid‐1990s Canada's federal government, concerned about a debt‐to‐GDP ratio that was approaching 70%, began a decade‐long policy of cutting government spending. It also increased taxes, but by only one dollar for about every six dollars of spending cuts. The Canadian government cut subsidies to individuals, corporations, and provincial governments while tightening eligibility for unemployment insurance. The government also sold off its holdings of various state‐owned enterprises. One major success was its shifting of air traffic control to NAV Canada, a private, non‐profit user cooperative. This step netted the government $1.4 billion at the outset, saved about $200 million a year in subsidies, and resulted in a technological revolution in air traffic control that has put Canada years ahead of the United States.From 1997 to 2008, Canada's government had an unbroken string of annual budget surpluses; and by 2009, Canada's debt‐to‐GDP ratio had fallen below 30%. Starting in 2000, the government used some of what otherwise would have been surplus to cut taxes on individuals and corporations. The corporate tax rate was cut in stages from 28% in 2000 to 21% by 2004.