Factbox: How Canada tamed its budget deficit

Mon Aug 8, 2011 6:23pm EDT
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(Reuters) - Canada took a decade to win back its prized AAA rating after debt downgrades in the early 1990s that were prompted by concern that its budget deficit was billowing out of control.

Here are some highlights of what took place over that decade, when a Liberal government tamed 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.

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.

January 1995 - A biting editorial in the Wall Street Journal calls Canada "an honorary member of the Third World."

The article is headline news in Canada.

February 1995 - Liberal Finance Minister Paul Martin introduces a budget where 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 party, the Reform Party, backs the spending cuts.

April 1995 - Moody's, which had warned of further downgrades even before the budget, cuts Canadian dollar debt from Aaa to Aa1. It also lowers foreign currency debt from Aa1 to Aa2, despite the fact that the markets had mostly supported the government's fiscal plans.

October 1995 - Quebec voters reject a proposal to separate from Canada, removing a layer of uncertainty that had pressured Canadian markets.   Continued...