Canada Economic and Financial Policy in the 1990s

By | December 25, 2021

The economic policy implemented by the federal government in the 1990s, particularly since 1994, is characterized above all by the commitment to reduce the public deficit. This policy was successful and, in 1998, the federal budget was in surplus. Based on this, the government intends to make significant reductions in the public debt / GDP ratio and reduce the tax burden. Monetary policy has been such as to allow for significant interest rate reductions which, in recent years, have reached their historical lows in a time span of 35 ÷ 40 years.

The recession that began in 1990 was more serious than expected and was further deepened in 1991, when there had been a real reduction in GDP of ‘ 1, 9 %. In 1991, the employment decreased by about 2 % and the unemployment rate (10, 4 %) returned to levels close to those of the recession of 1981 – 82 ; however, inflation remained rather high (around 5 %). The recovery in 1992 was very weak, with real GDP growth below 1% And a further rise in the unemployment rate (now at ‘ 11, 8 %). This was mainly due to the contained dynamics of private consumption and the slow recovery of the US economy. The slow recovery has also produced a further worsening of the public deficit and its incidence on GDP, which has reached an all-time high (8 %) since 1979. The 1993 showed a marked recovery, driven mainly by a strong performance of exports and private investment. Employment resumed growth (+ 1, 4 %) and inflation however remained contained (2.2%). Monetary policy followed an expansive orientation with low interest rates, while on the fiscal front attempts continued to reduce the weight of the public deficit (which however remained at levels close to those of the previous two years).

It is with the 1994 that the Canadian economy realizes a very vigorous growth, registering a growth rate of GDP (+ 3.9 %) among the highest in the OECD and a good increase in employment (+ 2, 1 %) . Although to a very limited extent, unemployment also fell. The economy benefited from the restructuring processes of previous years and from the good performance of exports, favored by the accelerating dynamics of the US economy. Despite strong growth, the inflation rate fell below 1 %. The fiscal framework has also improved. However, the period of strong expansion was short and only in 1997 the Canadian economy has returned to a GDP growth rate close to that of 1994.

In 1995, the growth rate more than halved due to a slowdown in exports and internal demand (especially investments). Nonetheless, the unemployment rate continued to decline, returning below 10 %. On the fiscal front, there was a further improvement in the ratio between public deficit and GDP, thanks to substantial spending cuts (social programs and reform of the unemployment benefit system) and low interest rates. In 1996, the real GDP growth rate remained low (+ 1, 2%); the unemployment rate remained almost constant compared to the previous year and employment slowed down its pace of growth. The fiscal policy adopted continued to be characterized by the commitment to reduce the financial needs of the public sector as much as possible. The impact on GDP of the public deficit has reached 2 %. On the monetary front, 1996 saw reductions in interest rates, especially in the short term. The balance of the current account of the balance of payments was positive (3,3 billion representing approximately US dollars 0, 5 % of GDP). For Canada public policy, please check

The 1997 is the first year of strong GDP growth (+ 3, 8 %) since 1994. Interest rates continued to decline (despite an increase in short-term rates towards the end of the year), which countered the restrictive effects of fiscal policy. In 1997, Canada realized a surplus of the federal public budget equal to 0.9 % of GDP; this is thanks to the containment of expenses, the good performance of the economy and low interest rates. The federal government has pledged to devolve part of the surplus to debt relief. The budget surplus is also used to finance additional expenditure and to make it possible to reduce the tax burden. From January 1, 1998, a new pension plan came into force, which aims to strengthen the sustainability of the social security system thanks to higher contributions and stricter and more rational criteria in the granting of pensions and subsidies. In 1998, a further worsening of the current account deficit slowed GDP growth, but unemployment fell further.

Canada Financial Policy