Deficits and Debt in Canada: Some Lessons from Recent History

Abstract

This paper reviews the recent history of federal and provincial deficits and debt in Canada with the purpose of investigating whether rules of behaviour need to be imposed on fiscal authorities as a way of controlling the growth of these deficits and debt. The evidence suggests that the need for rules governing provincial fiscal behaviour is weak because financial markets already impose such rules and that they have been effective at controlling provincial budgetary choices. Financial markets fail to impose similar rules at the federal level due to a lack of credibility regarding the Bank of Canada's policy of not monetizing federal debt.