In the years leading up to the mid-1990s, provincial and federal governments in Canada ran large budget deficits. These deficits built up as governments continued to borrow, primarily to finance current consumption. It was an unsustainable situation, made more serious by our aging population. Clearly, social spending had to be put on a viable long-term course.
And so fiscal policy needed to be based on a plan that would put the ratio of public debt to GDP on a steady downward track. This was a difficult hurdle to overcome, and the fiscal consolidation of the 1990s was painful. Now, here’s the good news.