Canada's Debt and Deficit History

With the Harper Government about to unveil their latest budget, I wanted to look back at a bit of history.  As I did in the case of Ontario, this posting will examine the recent fiscal history of Canada to see how we ended up in a situation where Finance Minister Jim Flaherty is being forced to take measures that will finally reign in the federal government's overspending habits.  As was the case in yesterday's posting, I am sourcing my data from a TD Bank publication.

First, let's look at Canada's political history, listing Prime Ministers and their political party affiliation:

1980 to 1984 - Pierre Trudeau (Liberal)

1984 to 1984 - John Turner (Liberal)

1984 to 1993 - Brian Mulroney (Progressive Conservative)

1993 to 2003 - Jean Chretien (Liberal)

2003 to 2006 - Paul Martin (Liberal)

2006 to 2011 - Stephen Harper (Conservative - minority)

2011 to present - Stephen Harper (Conservative - majority)

Let's open by looking at a chart showing Canada's fiscal history since 1986 - 1987:

Out of the past 27 fiscal years, Canada has run a surplus for only 11 years or 41 percent of the time, with all of them but two under the leadership of Paul Martin as either Minister of Finance or Prime Minister.  Canada's best fiscal year was in 2000 - 2001 when the federal government ran a $19.891 billion surplus (those were the days!) and its worst fiscal year was in fiscal 2009 - 2010 when the federal government ran a $55.598 billion deficit, erasing all of the gains that had been made between fiscal 2001 - 2002 and 2007 - 2008 in one fell swoop.

Now, let's look at a graph showing how Canada's surplus/deficit history looks in graphical form, showing quite quickly how much of the time our federal government has spent living well beyond its means:

In this last graph, we'll see how Canada's net federal debt has grown since 1986: 

At first glance you'll notice a relatively rapid rise in the level of Canada's federal debt between 1986 and 1997, followed by a gradual decline which is then followed by a rise after 2008, similar to what was experienced in the late 1980s and early 1990s.  In the past two and a half decades, the debt has grown from $281.8 billion to $641.8 billion in fiscal 2011 - 2012, an increase of $360 billion or 127.8percent.  During the Martin era, the debt actually dropped from a peak of $609 billion in fiscal 1996 - 1997 to a low of $516.3 billion in fiscal 2007 - 2008, a drop of $92.7 billion or 15.2 percent.  However, under the guidance of Mr. Flaherty (and yes, I know that we needed some stimulus and tens of thousands of Economic Action Plan signs and television commercials to prevent an even deeper recession), the debt has grown by $116.6 billion or 22.2 percent in just four fiscal years.  That is quite clearly an unsustainable growth level and is particularly alarming given the world's current economic picture.

Unfortunately for Canada's economy, over the past six months, the news out of Europe has not been particularly uplifting.  The Eurozone is Canada's second most important trading partner after the United States, accounting for 10.5 percent of Canada's external trade, with Canadian exports to Europe reaching €20.1 billion in 2010.  This trade is dominated by high-value goods including machinery, chemicals and transport equipment, the type of exports that keep many Canadians working.  Since it appears that the Eurozone economy is flirting with recession, this will have a direct impact on Canada's economic growth and ultimately on Ottawa's corporate and personal tax revenue.

Let me sidetrack for one moment to put Canada's current situation into perspective based on something that Mr. Harper said when he was a Reform MP.  He was addressing the issue of Alberta Premier Ralph Klein's attempts to balance the province's budget and reduce debt.  Here is the quote:

"Although I can't speak of the details because it is not my area of expertise, what Mr. Klein is doing in Alberta is, in principle, what governments need to do.  He is taking a look at a situation that is unsustainable financially and he is taking the steps necessary through expenditure reductions to eliminate that financial uncertainty on a permanent basis within the life of a single Parliament.  That is the only way it ever gets done.  Any politician who says he is going to do it over two Parliaments is never going to do it.  That's the golden rule.  That's something that you can learn from Ralph Klein." (my bold)

Apparently, that's a lesson that has gone unlearned in the past four Conservative budgets.  I guess history can rewrite itself given enough time.

From all of this data, it is quite clear that, unless the Harper government changes its spending ways very, very soon, Canadian taxpayers could well find themselves stepping up to the plate and helping Ottawa fund its ever-rising and painful debt levels with higher taxes.  We could quite easily find ourselves in the same situation that we were in during the early part of the 1990s when interest rates peaked and our sovereign debt situation looked increasingly shaky.  Let's hope that our politicians in Ottawa exhibit behaviour that shows that they can be fiscally responsible for a change.  Perhaps this time, Mr. Harper will remember the importance of his "golden rule".