Bad fiscal policy in Canada

By Lyndsey Vanadament

Bad fiscal policy put Canada in the red, but it was 15 years without an effective response that allowed the debt to mushroom to $580 billion in 1997, argues U of C economist D. Ron Kneebone in a recently published paper entitled.

"Making a bad decision got the ball rolling, but the lack of speed in correcting the problem was ultimately the real source of the debt problem," said Dr. Kneebone.

The paper, titled "Where Did Canada’s Debt Come From?" and co-authored by former University of Calgary graduate student Jennifer Chung, showed three quarters of the debt amassed by the Canadian government was a result of bad and irresponsible fiscal policy.

Dr. Kneebone explained Canada is now suffering cutbacks to health and education in atonement not only for budget surpluses in the 1970s but over a decade of policy which ignored the growing debt while compound interest intensified the problem. Though high interest rates and recessions were contributing factors, Dr. Kneebone says the government foolishly failed to use periods of strong growth to pay down the debt.

He suggests students unhappy with tuition hikes look to their parents for an explanation. They supported the government spending in the 1970s students are now paying off.

"For a long time the government wasn’t even making the minimum payment," said Dr. Kneebone, comparing Canada’s debt to a credit card. "You can’t stand there and do nothing about it,"

Though economists were critical of the government in the early 1980s, it was not until 1995 that the government made cutbacks. Though cutbacks are never popular Dr. Kneebone says they were on the right track.

At its peak the deficit was 70 per cent of Canada’s GDP but through budget surpluses and GDP growth it has now fallen to 45 per cent, and Finance Minister Ralph Goodale just announced his goal of reducing it further to 25 per cent.

Kneebone says this goal should be attainable by 2010 at which time the funds for paying interest will be available for areas such as health care, education and tax cuts.

"The moral of the story? You can’t let your debt get out of control," concluded Dr. Kneebone.

“Where Did the Debt Come From?” will be published Feb. 18 by the Institute for Research on Public Policy. Read the first chapter online at: http://www.irpp.orgindexe.htm