How much can a government afford to cut spending if economic growth is tepid? It’s a question Finance Minister Jim Flaherty must be asking himself these days, poor guy. No doubt Flaherty would like to keep cutting to shrink the deficit, but as the economy weakens, he’s coming under pressure for another round of stimulus spending.
This was not a problem then-finance minister Paul Martin faced back in the mid-1990s. In those days, economic growth was bettering all expectations, and spinning off more tax revenues that Martin’s fiscal strategists foresaw. I’ve argued this helped him mightily in his deficit-shrinking task, easing the need to reduce spending.
My colleague Andrew Coyne says I’m wrong. He contends that “deep cuts in spending” did the job. “How deep?,” he writes. “From $122-billion in the year [Jean Chrétien’s Liberals] took office, and $123-billion after their first budget, spending was slashed over the next two years by $12-billion.”
For the sake of clarity, I propose we look at the period from the first year Jean Chrétien’s government was in office to the year they balanced the books. That would be 1993-94 to 1997-98. Spending fell six per cent during that key span, from $122 billion to $115 billion, or $7 billion less. During those years, revenues rose 30 per cent from $124 billion to $161 billion, or $37 billion more.
How is it again that spending restraint mattered more than the taxes churned out by a booming economy?