As a result of the recent economic crisis, governments have been relying on increased spending, financed by large deficits, to pull their countries out of recession. Eventually they will face the challenge of restoring fiscal stability.
In the early 1990s all levels of government in Canada were running a budget deficit of 9.1% of GDP. The deficit of the Government of Canada stood at 5.3 % of GDP and public debt was 65% of GDP and rising. Canada’s currency was weak and it faced the prospect of being crippled by debt if investors lost further confidence. Just a few years later, Canada’s budget deficit was cut to zero and, in eight years, public debt was cut by a third. So how was this turnaround achieved?  

1993-1999: Canada’s road to fiscal sovereignty The Canadian government used Program Review as its primary vehicle to eliminate the deficit. Program Review posited that it was vital to evaluate the relative importance of government programmes and services within the overall fiscal framework. The exercise was less about what to cut and more about what to preserve in order to give Canada the comparative advantages needed to prosper in the future.

Program Review was based on a common set of principles, framed as six interconnected tests. The tests consisted of an interactive sequence of questioning, taking into account the role of government and the effectiveness and affordability of the overall proposal (see Figure 1 below). It was an ongoing process that looped back on itself should the overall proposal not generate significant savings.

Program Review relied on Ministers and Deputy Ministers, equivalent to the UK’s Permanent Secretaries, to be the architects of departmental reforms. As a team, they were given the responsibility to come forward with a common proposal, taking into account the Canadian government’s three-year fiscal plan. To ensure a focus on role realignment rather than cuts, departments were not given individual fiscal targets until later in the exercise.

Program Review was an open process. The Minister of Finance undertook a broad dialogue with private sector experts, Parliament and the Canadian public about planning assumptions and potential fiscal measures. This contributed to the building of public understanding and support for an ambitious reform programme. Planning assumptions for growth and interest rates were more cautious than the private sector average.