Analysis: Canada has lessons, no answers, for U.S. debt woes

Mon Aug 8, 2011 7:00pm EDT
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By Randall Palmer and John McCrank

OTTAWA/TORONTO (Reuters) - Canada has some lessons for the United States in terms of slashing deficits and winning top tier ratings back, but there are deep differences between the two countries in terms of what might work.

Canada's Liberal government won broad political support for its efforts to cut the deficit in the decade after its first international ratings downgrade in 1992, but the United States faces deep political divisions about how to respond.

Ottawa's chosen route back to surplus involved both spending cuts and tax hikes, in a ratio of roughly seven to one. The budget was balanced within six years, and Canada won its prized AAA rating back within a decade.

"You basically have to grasp the nettle," Paul Martin, the Liberal government's finance minister at the time, told Reuters in an interview. "Fundamentally, you have to have an end game, you have to take immediate action."

Martin, also a former prime minister, said he was confident the United States could balance its budget, but it would need tax hikes as well as spending cuts.

"The actions have to be primarily on cutting expenditures, but the fact is that you cannot do it unless everybody is willing to come to the party, and if you eliminate tax increases... you're never going to make it."

Tough advice also came from Monte Solberg, who was finance critic for the conservative opposition Reform Party during Martin's deficit-cutting years.

In a display of inter-party co-operation that's rare outside wartime, Reform backed the Liberals as they cut the deficit, ushering in an era where it became political suicide for a federal Canadian politician even to talk about running a deficit.   Continued...