The result, when commodity prices subsequently collapsed, was a continuing spiral of rising government deficits and double-digit inflation, both of which took many years to resolve. The ultimate cost in terms of lost output and employment was enormous. What can policy-makers do to improve the situation?
Now, let me turn from Canada’s experiences in the 1970s to some of the broader policy lessons that can be drawn. Policy-makers can learn from past mistakes and help to ensure better outcomes in three important ways. First, fiscal authorities should avoid behaving in a procyclical manner, exaggerating the boom with aggressive increases in spending and stimulative tax reductions.