Greece and Canada: Two tales of fiscal consolidation

By Nikos Konstandaras

Greece and Canada, one of the most creditworthy countries, are worlds apart. What they do have in common is that both are applying fiscal consolidation programs: Canada has been doing so willingly since 2011, with the aim of wiping out a deficit of 4.9 percent of GDP by 2017; Greece, with its back to the wall, has been in its program since 2010. We are living with the consequences daily. It is worth looking at how Canada is doing things.

Aside from its natural wealth, the size of its economy and the fact that it faces no trouble on its borders, Canada has the added benefit of having experienced fiscal consolidation before. After decades of ballooning debt, in 1994 the federal and provincial governments adopted a program which by 1997 had wiped out a deficit of 8.3 percent of GDP. The federal government cut many of its operations, reduced defense and foreign aid spending, as well as business subsidies, while also cutting social program transfers to its provinces. It adopted reforms aimed at spurring growth, including free trade, tax reform and reforms to employment, insurance and public pension plans. Taxes were cut, debt was reduced and, with greater credibility, the economy began to grow. Whereas from 1992 to 1994 GDP grew at an average of 0.4 percent (as opposed to 2 percent in the US), from 1994 to 1996 it rose 3.3 percent (3.8 percent in the US), and from 1998 to 2000 by 4.8 percent (4.5 percent in the US).

The lesson from Canada’s experience is that the government has to make credible plans and communicate their benefits to citizens. The measures must be clearly defined and economic assumptions must be prudent, delivering more than they promise. The current fiscal consolidation program in Canada was a result of the global economic crisis and the stimulus response to it leading to a deficit of 4.9 percent of GDP. It includes corporate and personal income tax reductions, the closing of tax loopholes, infrastructure investments, reining in defense spending and controlling public sector wage growth. This time there has been no reduction in the growth of transfers to provincial governments – which are expected to have erased deficits in 2017, along with the federal government.

“Consolidation has to be initiated as soon as possible. Don’t be timid. Early progress will boost confidence in the private sector and support the economy,” comments a senior Canadian official involved in the program. “Focus on spending reductions and measures that will increase potential growth.” According to the OECD, Canada is on the right track: It expects its GDP to grow by 2.5 percent this year and 2.7 percent in 2015. In short, restraining spending does not preclude growth. Greece – with its depression and asphyxiation, with taxes that keep rising, with the lack of political and public support for the program – clearly has much to learn. The question is: If we in Greece did not know how best to achieve consolidation, why did the troika not know better?