TIMELINE-How Canada tamed its budget crisis

Mon Nov 21, 2011 10:15am EST
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(Reuters) - Under pressure from financial markets, Canada eliminated its budget deficit in short order in the 1990s, going from the second worst fiscal performer in the Group of Seven industrialized nations, after Italy, to the top of the pack.

Here are highlights of what led to the Liberal government slaying the deficit with the backing of a conservative opposition party.

October 1992 - Standard & Poor's cuts its rating on Canada's foreign-denominated government debt to AA-plus from AAA on concern about the current account deficit, a growing government debt load and uncertainty about the political situation in French-speaking Quebec, home to a popular separatist party.

February 1994 - The newly elected Liberal government brings down what it considers to be a tough budget, aiming to lower the deficit-to-GDP ratio to 3 percent by 1996. It nonetheless still has spending rising slightly, and immediate public and market reaction is it did not go nearly far enough.

June 1994 - Moody's Investors Service lowers its rating on Canada's foreign currency debt to Aa1 from Aaa, citing the government's large and growing public debt.

December 1994 - Mexico has a run on its currency in what became the Peso Crisis.

January 1995 - A biting editorial in the Wall Street Journal headlined "Bankrupt Canada" calls Canada "an honorary member of the Third World," lumping it in with Mexico and suggesting the International Monetary Fund might have to come to its aid. The commentary is headline news in Canada.

February 1995 - Liberal Finance Minister Paul Martin introduces a deficit-cutting budget in which deep spending cuts outweigh tax increases by seven to one. "Not to act now to put our fiscal house in order would be to abandon the purposes for which ... this government stands - competence, compassion, reform and hope," he says. In a display of unity that's rare outside wartime, the right-wing opposition Reform Party backs the spending cuts.

April 1995 - Moody's, which had warned of further downgrades even before the budget, cuts its Canadian dollar debt rating to Aa1 from Aaa. It also lowers foreign currency debt to Aa2 from Aa1, despite the generally positive market reaction to the government's fiscal plans.   Continued...