[MGSA-L] Canada’s fiscal adjustment has lessons for Greece

June Samaras june.samaras at gmail.com
Thu Aug 14 19:49:09 PDT 2014

Missing from the supposed equation is the underlying advantage Canada has
with its immense natural resources.

June S

Canada’s fiscal adjustment has lessons for Greece

  “Eight percent of the Canadian land mass is covered by water, and 92% is
covered by debt” -Grant’s Interest Rate Observer, May 1993
By Basil Zafiriou*

Canada today is one of the most fiscally sound countries on earth, but that
wasn’t always the case. Twenty short years ago, the country was drowning in
debt and deficits, with a level of indebtedness similar to that of Greece
at the time. How Canada managed to cure its fiscal frailty can help shed
light on Greece’s more tortuous path to fiscal health.

As the accompanying chart shows, both Canada and Greece experienced a
steady increase in government indebtedness from the early 1980s to the
mid-1990s. By 1995, gross government debt in both countries had reached
100% of GDP.

Greece’s debt stayed more or less at that elevated level, until the onset
of the recent financial crisis propelled it sharply higher. Canada
introduced an ambitious fiscal restraint program in 1995, which put the
country’s finances on a path that brought the debt/GDP ratio down to a low
of 67% in 2007, before the financial crisis caused the downward trend to

Remarkably, Canada’s restraint program achieved its targets without adverse
effects on output. Economic growth dipped marginally during the first year
of restraint, but then accelerated and remained robust thereafter.

Greece too has made amazing progress in rebalancing its books over the past
four years, but this progress has been very costly in terms of lost output
and jobs. And Greece’s indebtedness has continued to climb owing to a
rapidly shrinking economy.

Key factors explaining Canada’s success and Greece’s difficulties

What accounts for the difference in the experiences of the two countries?
Greece started its fiscal adjustment from a much weaker position, and the
fiscal restraint required was correspondingly greater. But other factors as
well favoured Canada, the following being key:

A supportive external environment. In particular, the US (by far Canada’s
major trading partner, accounting for over 70% of Canadian exports)
experienced strong economic growth during the late 1990s, with GDP growth
averaging over 4% annually. By comparison, the EU experienced a deep
recession in 2008-09 and a sluggish recovery since.

An accommodative monetary policy. The Bank of Canada rate was reduced
progressively from 8.5% in March 1995 to 3.25% in November 1996. The ECB
also loosened monetary policy in the wake of the financial crisis in 2008,
but reversed course and started raising interest rates by the end of
2010--while the Greek economy was still sinking deeper into recession. (ECB
policy has become more stimulative since the accession of Mario Draghi to
the Presidency in November 2011.)

A depreciating currency. The Canadian dollar fell from 73 cents US in 1995
to 67 cents in 1998, helping improve the competitiveness of the Canadian
economy and strengthening Canada’s trade balance. Being part of the
Eurozone, Greece of course lacks the option of devaluing its currency to
improve competitiveness.

Strong consensus on the need for fiscal consolidation, and hence widespread
public support for the measures taken. Measures taken at the federal
government level included a 10% reduction in program spending, elimination
of more than 50,000 jobs, privatization of public assets and contracting
out of services. Public service unions opposed these measures, but there
were no strikes, work stoppages or other coercive attempts to thwart
implementation. The government had gone to great lengths to explain to
Canadians the need for retrenchment, and they accepted the message. It
helped that the official opposition in Parliament was on board. Indeed, its
main criticism was that the government was being too timid in its
deficit-cutting efforts. Strong support facilitated implementation of the
program. It also lent the program credibility, which helped stimulate
consumer and investment spending, offsetting the reductions in government

In Greece, as we all know things have been very different. Here,
virulent--and often violent--opposition to austerity measures slowed the
pace of reform, discouraged tourism and drove out investment. The resulting
reduction in private sector spending compounded government cut-backs,
driving the economy deeper into recession. A shrinking economy meant lower
government revenues, requiring even further cut-backs to meet deficit

Since Canada’s fiscal consolidation in the 1990s, the Canadian economy has
outperformed the economies of all G-7 countries in growth and job creation.
It weathered the recent financial crisis best and exited it first. The
experience has taught Canadians to value fiscal prudence and be wary of
slipping back into runaway deficits and debts. Political parties across the
spectrum are one in their espousal of balanced budgets and low debts.
Greece is not there yet. But Canada’s experience can encourage Greeks to
look with optimism to their own future beyond retrenchment, and to stay the

*Basil Zafiriou is an economist, retired from the public service of Canada

June Samaras
2020 Old Station Rd
Canada L5M 2V1
Tel : 905-542-1877
E-mail : june.samaras at gmail.com
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