Macroeconomic Austerity Works
It's always surprising to hear an economist argue that macroeconomic austerity doesn't work, particularly when the economist is Canadian and was a recent advisor to the minister and deputy minister of finance of a purportedly conservative government (of course, in Canada, even a so-called federal conservative party is actually quite liberal). The shock comes because Canada actually ran the macroeconomic austerity experiment between 1993 and 2006, and it worked. Even more amazing is that the experiment was successfully run under a liberal government. Perhaps some economists should be more aware of their nation's own economic history.
The following plot shows general government total expenditures as a percentage of GDP for Canada and the USA between 1980 and 2012.
Between 1980 and 1992, under the governments of Pierre Trudeau (1980-1984, Liberal Party) and Brian Mulroney (1984-1993, Progressive Conservative Party), Canada's general government total expenditures rose from 43.9% up to 54.0% of GDP. In 1993, Jean Chretien (Liberal Party) won the election and appointed Paul Martin as finance minister with an austerity mandate. Chretien was prime minister from 1993 to 2003. Martin won the Liberal Party leadership race after Chretien left office in 2003, and he governed from 2003 to 2006.
Martin's financial reforms and steady economic management skills reduced general government total expenditures from 52.9% of GDP in 1993 down to 38.8% in 2006. Martin's last full year as prime minister was 2005, at which point the expenditures were only 38.6% of GDP. In February 2006, Martin lost a federal general election to Stephen Harper and the Conservative Party -- who have governed since.
Between 1980 and 1992, per-capita general government total expenditures on a purchasing power parity (PPP) basis in constant 2005 international dollars rose by over 38% from $10,127 to $14,003. Over the 1993-2006 timeframe under Martin's leadership, these per-capita expenditures declined from the 1992 high to $13,879 in 2006, reaching a low of $12,707 in 1997 -- only a few years after the austerity measures began. Unfortunately, Canada's current per-capita expenditures then increased dramatically after 2006 when Martin left office, reaching a maximum of $15,150 in 2010 and their current 2012 value of $14,723.
How did these 1993-to-2006 austerity measures affect Canada's economic performance? During the high-spending period between 1980 and 1992, per capita GDP-PPP in constant dollars rose by only 12.4%. During the corresponding austerity interval from 1993 through 2006, constant-dollar per-capita GDP-PPP rose by 27.4%. A clear win for austerity.
What about Canada's comparative deficit/debt performance during the respective periods of fiscal irresponsibility (1980-1992) and responsibility (1993-2006)?
Between 1980 and 1992, Canada's net lending/borrowing balance declined from -3.9% of GDP in 1980 (i.e., a large annual deficit) down to -9.1% of GDP in 1992 (i.e., an even larger annual deficit), averaging an astonishingly poor -6.3% of GDP over this period. From 1993 to 2006, this annual balance increased from -8.6% in 1993 to +1.8% of GDP (i.e., a surplus) in 2006, averaging only -0.9% during this timeframe -- and surpluses each year from 1997 through 2006.
The story is even more favorable towards austerity on a primary net lending/borrowing balance basis. Between 1980 and 1992, the balance averaged a deficit of -2.3% of GDP. Compare that with the surplus average of +2.5% between 1993 and 2006. The austerity success was so rapid that, after reaching a primary net lending/borrowing balance low of -3.8% of GDP in 1992, the austerity measures started in 1993 had already turned this into a surplus of +0.4% by 1995, and maintained this surplus (which hit a maximum of +6.0% in 2000) all the way through 2006.
After a massive increase (over fourfold as a percentage of the economy) in Canada's net debt between 1980 and 1992, the austerity period saw the debt reduced from 64% of GDP in 1993 to only 26% in 2006. Similarly, after gross debt doubled between 1980 and 1992, austerity reduced it from 96% of GDP in 1993 to 70% in 2006.
In 1980, Canada's unemployment rate was 7.5%. After years of excessive government spending, by 1992, it was 11.2%. Along comes austerity, and the unemployment rate falls from 11.4% in 1993 to only 6.3% in 2006.
Macroeconomic austerity doesn't work? Absolute nonsense. During its austerity period, Canada's per capita government expenditures fell, its per capita GDP increased far more rapidly than during the prior period of rapid spending growth, its large deficits turned into large surpluses, its debt was dramatically reduced, and its unemployment rate fell like a rock. This is a lesson that not only the rest of the world needs to heed, but apparently also Canadian economists who have recently advised a faux conservative administration.