In the 1995 budget, prime minister Jean Chrétien, left, and finance minister Paul Martin slashed spending by $25-billion, deploying a strategy that balanced the budget within three years.Tom Hanson/The Canadian Press
Edward Greenspon is the co-chair of the Future of Canada Centre and an executive adviser at Deloitte Canada. He was previously editor-in-chief of The Globe and Mail and Ottawa bureau chief during the 1990s fiscal crisis.
Three decades on, 1995 is back in the air – the last time a Liberal government faced a fiscal reckoning and famously stared it down. In the epic budget of that year, prime minister Jean Chrétien and finance minister Paul Martin slashed spending by $25-billion, the equivalent of about $75-billion today, paring the size of government back to early 1950s levels.
Within three years, Canada had balanced its books for the first time in 27 years, paving the way for broad tax cuts, a national child benefit, post-secondary research supports and withstanding the Great Financial Recession and COVID-19.
The similarities with today are enough to give an observer a case of double vision, which happens to be the title of the best-selling insider account Anthony Wilson-Smith and I wrote on the extraordinary sequence of events that had the government and country hanging in the balance.
It raises the question: what lessons should the current crop of Liberals be absorbing from 1995?
The fiscal response of 30 years ago had to be calibrated against a unity emergency in Quebec. Yet that’s nothing compared with now. The current crew is juggling four immediate and overlapping crises at once. Fiscal and unity issues are back in one form or another, this time joined by the existential tariff challenge and a chronically underperforming economy that has weakened living standards and national competitiveness and fallen disproportionately on younger Canadians struggling to establish careers, acquire housing and amass savings.
“Carney has a much more difficult problem than we had in 1994-95,” David Dodge, the deputy minister of finance who led the charge and later recruited the current Prime Minister into public service, reflected in an interview. “Today, we have a growth problem. Our standard of living is going down the tube because we have not been investing or had policies favourable to investing and growth.”
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It can’t be overstated how profoundly more complex four-dimensional chess renders policy-making. While the Mulroney government bequeathed the 1990s Liberals an unsustainable firehose of deficits and debt, its trade, investment and taxation reforms had begun to invigorate the economy. Mr. Chrétien’s decision to stick with NAFTA was rewarded with an export boom that alleviated much of the austerity pain.
“The American consumer basically bailed us out,” Mr. Dodge says.
That seems unlikely this time out.
The current fiscal situation isn’t quite the towering inferno of 1995. Deficits and debt are smaller relative to the economy, and interest costs eat up 11 cents of every tax dollar versus an unfathomable 30 cents back then. But the numbers are trending in an uncomfortably familiar direction. Interest costs were just six cents on the dollar as recently as 2021-22. The heroic 1995 efforts to wrestle federal spending down to the 13 per cent of GDP levels of the postwar boom have been relinquished as we top 16 per cent again. And as the lessons of the 1990s recede, Canada will record its 18th consecutive budgetary shortfall this year – and that’s before counting new demands from the five-alarmer south of the border. Defence spending, traditionally the first stop in any Canadian austerity program, is set to jump 50 per cent this year and keep climbing. Adjustment policies are being rolled out for businesses and workers side-swiped by tariffs, and national projects are in the works to jolt the sclerotic economy.
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Even if the coming budget merely reallocates expenditures – Mr. Carney’s austerity and investment formulation – each cancelled or shrunken program serves well-organized interests that are highly averse to losing ground.
Despite their reams of numbers, budgets are first and foremost political documents. The ground must be prepared. In the only budget brought forward by Joe Clark’s government in 1979, finance minister John Crosbie surprised Canadians with his message of “short-term pain for long-term gain.” Ten weeks later, the Liberals were back in power.
Mr. Chrétien, the Obi-Wan Kenobi of Canadian politics, wasn’t prone to rookie mistakes. He reasoned that Mr. Martin couldn’t carry the country if he didn’t first win over cabinet colleagues accustomed to thinking of the other guys as the hackers and slashers. Recalcitrant ministers would search for hints of light between him and his finance minister.
In the spring of 1994, having accepted his first budget had come up short, Mr. Martin informed cabinet he would impose a spending freeze immediately; Mr. Chrétien said nothing. A minister tested the waters, talking up a pet project requiring new money. “Didn’t you hear the minister of finance?” Mr. Chrétien interjected. “Just 10 minutes ago, he said there wouldn’t be any more money.” A short while passed and a second minister floated another initiative. Mr. Chrétien tapped his pencil impatiently. “Didn’t you hear me 10 minutes ago? I said there is no money.” He then threatened a 20-per-cent budget cut for the next minister to suggest new spending. Mr. Martin knew then and there that despite their political rivalry, his back was covered.
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To develop an airtight consensus at the heart of his government, Mr. Chrétien created a cabinet committee to review all program expenditures, stacking it with his most resistant, left-leaning ministers, and letting Finance officials at them.
The 1994-95 program review differs in fundamental ways from today. Rather than across-the-board cuts, each minister was given an individualized reduction target adding up to a 20-per-cent cut overall. Industry and Transport were sliced in half. Only Indian and Northern Affairs was spared. Ministers appeared one-by-one to answer six fundamental questions, starting with whether a given program continued to serve the public interest.
Coupled with their customized targets, the questions turned a cost-cutting exercise into a resetting of government priorities. In a major speech to the annual Jackson Hole economic policy symposium that summer, Mr. Martin explained how the “risk of looking like losers to their constituencies” makes differentiated targets difficult. “That is why all governments are tempted to resort to uniform cuts across all programs. And while this can sometimes be justified in the early stages of fiscal consolidation, it eventually becomes a cop-out.”
Week after agonizing week – and influenced by a Mexican peso crisis jacking up Canadian interest rates – even the most skeptical program review committee members accepted they were in a game of trade-offs, not clean choices. It wasn’t about what’s Liberal and what not, but what is more Liberal and less Liberal.
Meanwhile, Mr. Martin opened a second front, putting transfers to provinces and individuals – which then as now comprise about 43 per cent of federal spending – on the table. Health, post-secondary and welfare allocations were reduced and repackaged and unemployment insurance further squeezed. In contrast, the current government, which is working closely with provinces on national interest projects, has said it will leave out transfers, which comprise more than 40 per cent of government expenditures.
In time, the Chrétien government would cut such Liberal untouchables as health funding, women’s shelters and the CBC. It would slash dairy subsidies by 30 per cent, end the century-old Crow rate for grain, and impose landing fees of $3,150 on an immigrant family of four – all the while going up in the polls.
Mr. Martin would later attribute the political success of the 1995 budget to the shock and awe of cutting so much at one time. Each action provided political cover for another action, making it difficult for lobby groups to campaign for a pass without sounding indifferent to the greater cause.
Mr. Chrétien raises an arm with finance minister Paul Martin, right, after Mr. Martin released a balanced budget on Feb. 25, 1998 in Ottawa.Jim Young/Reuters
The public was well primed. Mr. Martin had set the stage by turning his fiscal update in October, 1994, into a pair of highly choreographed appearances before the Commons Finance committee. On day one, he provided the context for what was holding back the Canadian economy. On day two, he explained how accumulated deficits hobbled growth and famously vowed to slay them “come hell or high water.”
Canadians had context for what was to come. When the budget was delivered four months later, polling found that even among the 60 per cent of Canadians who believed it would be bad for jobs and social programs, two-thirds gave their reluctant endorsement.
As with 1995, the 2025 Liberal government is again led by pragmatists surrounded by activists. Like then, the goalposts keep moving on them. Unlike then and despite the Trump threat, it is unclear a fiscal consensus has formed within government and in the country-at-large. Certainly, the process has not enjoyed the breathing space of 30 years ago.
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All this suggests that perhaps we’re back in 1994 more than 1995, with a dash of 1984 thrown in for good measure.
In the 1994 budget, the government thought it had put in place all the pieces for a fiscal correction, but learned otherwise as the deficit kept growing. Mr. Martin quickly went back to work. As Mr. Dodge acknowledges, “it turned out it was the first of two steps. Not that it was planned that way.” The second step furnished the clarity for more radical measures and a political narrative Canadians could rally around.
In 1984, as the Mulroney government realized its fiscal problem was, like today, tethered to broader growth challenges, it found its own ready-made storyline too, in the Macdonald Royal Commission’s “leap of faith” on free trade.
Donald Trump has provided an opening for new leap of faith. But is a new national narrative emerging that connects the dots among the four crises, particularly the fiscal one, and captures the imagination of Canadians? How can cost-cutting be turned into priority-setting and transformation? Is a more radical fiscal approach necessary to prevent 18 deficits again leading to 27? Is a relatively new government ready? What’s the target that anchors the effort?
Don’t be surprised if some of these answers await a second budget in 2026. It’s feeling like 1994 all over again.