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Why Canada's Austerity Isn't a Good Example for U.S.

Premature deficit cuts tend to chill an economy's growth rate
Why Canada's Austerity Isn't a Good Example for U.S.
Photograph by Andre Pichette/AFP/Getty Images

Canada was in such bad shape in the early 1990s that its dollar was called the “northern peso” and the Wall Street Journal sarcastically called Canada an honorary member of the Third World. Liberal Prime Minister Jean Chrétien took office in 1993 and put Canada on a brutal austerity diet. Big spending cuts and smaller tax increases took the federal budget from a big deficit to a surplus in just four years. And Canada’s economic growth rate accelerated from less than 3 percent in 1993 to more than 4 percent in 1998.

An editorial in the Washington Times last December said the U.S. “ought to follow the example of responsible nations” like Canada. Reuters reported last November that members of Canada’s deficit-slaying team “have since advised countries as far-ranging as Bahrain and Bangladesh.” Canada’s National Post credits Chrétien’s Liberal government with keeping the lid on spending after growth recovered, noting, “Most governments would not have been so restrained.”