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The 1992 Canadian down grade

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August 07, 2011 – Comments (4)

This story amazed me with the comment "S&P’s cut may serve as a wake-up call as it did for Canada in 1992."

Many times on my blog I have raved that Mulroney was one of our greatest Prime Ministers for what he did for getting Canada back on track for controlling our debt.

In 84 when he was elected the Canadian deficit was $40 billion without debt servicing charges.  By the time he left that program spending deficit was gone.  There was still the interest on the debt not being covered and debt reduction to tackle, but Canada was already 8 years into working towards turning the debt and deficit problem around.

Indeed, I think one of the main things Mulroney did during his time as Prime Minister was go on about Canada's need to rein in our debt problem, and he made huge gains in the the first steps of what needs to be done to bring deficit budgets and debt under control.  The rate of increase in debt was declining through most of his reign.  Ok, in 1991 we got Mazankowski as finance minister and he was an idiot, and our rate of increase in spending under that moron was increasing again, so that was the year before that 1992 downgrade, but Canada was in a far worse position most of the decade before.

The deficit/debt problem has two parts that have to be considered, how much more spending do you have then receipts coming in, and how big is the debt.  Canada was actually in far, far better shape in the deficit part in 1992 then it had been the preceding decade and in a position to rein it in fairly quickly.  

I was going on about this as recently as 10 days ago in the comments of "A visualization of the American Debt." 

Something I don't think people completely realize is how enormous the process is to get to a balanced budget.  You simply can't do it fast or you completely kill your economy.  The US is in a terrible position to rein in the deficit and has massive debt at the same time and is at the beginning of a very long road to turning this situation around, and each year the debt still gets bigger and so the debt servicing charges are increasing and that cuts into any spending cuts.

In any event, in 1992 the S&P's actions were 8 years late in being a so called wake-up call. 

4 Comments – Post Your Own

#1) On August 07, 2011 at 10:53 AM, smartmuffin (< 20) wrote:

You simply can't do it fast or you completely kill your economy

You also can't do it slowly without risking political suicide.  The complete joke of the phony cuts of the recent "debt ceiling compromise" are already characterized as being "draconian cuts" in the media complete with advertisements of Republicans throwing your grandma off a cliff.

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#2) On August 07, 2011 at 12:32 PM, Bays (30.22) wrote:

If i'm not mistaken, Canadian markets did well that year, as well as the year after too.

 

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#3) On August 08, 2011 at 12:12 AM, dwot (72.18) wrote:

 Bays,

I just had a look at a historical chart.  Looks like the TSX was up about 5% in 85 and down about 2% in 92, and then up 38% in 93.  Canada was actually on the path to doing a good job with debt reduction when it was downgraded by the S&P.

smartmuffin,

What they have proposed is simply too slow.  If they follow what seems to have been proposed I think they get to where they need to be in 2-3 years.

 

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#4) On August 08, 2011 at 1:34 PM, ByrneShill (77.57) wrote:

US's credit ratings stands solely on their financial capacity of raising taxes (a 4% GST would solve almost all their financial problems, and since US is the least taxed country of the G7, it wouldn't be really thgat costly to do so). Should it be politically impossible to raise taxes, then that capacity is useless. Everyone with more than half a financial brain knows what the solution is to keep the deficit in check, it's just politically damaging to talk about the elephant in the room.

 As for Mulroney, he's hated in english canada because he tried to make Quebec enter the federation with "honor and enthousiasm". Trudeauists sure wouldn't let that happen. By considering Mulroney one of the greatest PMs, you sure are swimming against the flow.

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