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Economy

Canada’s federal government disregards its own fiscal rules—unlike Sweden

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5 minute read

From the Fraser Institute

By Grady Munro and Jake Fuss

During the 1970s and 1980s, Canada and Sweden both saw a deterioration in government finances. However, hard times in the early 1990s transformed the approach to fiscal policy by governments in both countries, including reducing spending and borrowing, and ultimately returning to balanced budgets. While Swedes have carried on the legacy of fiscal responsibility in subsequent decades, Canadians seem to have forgotten the hard lessons of recent history and have fallen back on the fiscal approach that got us into trouble in the first place.

In his recent book, Swedish economist Johan Norberg explains that for most of its modern history Sweden has been a testament to the success of the free market, rather than a model socialist economy. The country only experimented with socialism for a short period, with disastrous results.

Sweden’s socialist experiment during the 1970s and 1980s saw substantial income redistribution and the introduction of a large welfare state. As a result, the size of government doubled as a share of the economy (measured by GDP). Yet despite increases in taxes, particularly targeting corporations and the wealthy, the government could not raise the funds to pay for such a sizable expansion of the welfare state. Instead, Sweden ran deficits in every year from 1970 to 1987, government debt rose from less than 18 per cent of the economy (GDP) in 1970 to over 70 per cent in 1985, and the private sector completely stagnated.

This approach brought about a financial crisis in the early 1990s that saw interest rates briefly rise as high as 500 per cent. In the wake of this crisis, the Swedish government declared the socialist experiment a failure, and the country saw substantial reform that emphasized balanced budgets, lower taxes, and an open business environment. Rules were set in place to ensure fiscal discipline, and as a result the country has enjoyed consistent surpluses and government debt has fallen from 83.2 per cent of the economy in 1998 to 58.8 per cent in 2021, despite still maintaining a large welfare state.

During the 1970s and 1980s, Canada also experienced a deterioration in government finances. Canada’s issues stemmed from a substantial expansion in the size and role of government in conjunction with rising interest rates. The federal government ran uninterrupted budget deficits from 1970 through to the mid-1990s. Federal government debt rose to over 70 per cent of GDP during this period and debt interest costs were consuming more than one-third of federal government revenues.

By the early 1990s federal finances were in shambles and the economy was stagnant. A new federal government was elected, led by Jean Chrétien, which implemented significant fiscal reform in 1995 based on spending restraint, balanced budgets and lower taxes. The provinces enacted similar reforms, and from the late 1990s through the 2000s, Canadians enjoyed consistent surpluses, debt reduction, and strong economic growth.

While there are clear parallels between the countries, unlike Sweden, Canadians has since reverted back to the risky fiscal approach of the 1970s and 1980s. Since 2015, Canada has seen historically high federal spending, and a string of federal and provincial budget deficits. Consequently, government debt and its associated costs have grown substantially.

Since the 1990s, both Canada and Sweden have had fiscal rules in place to help ensure the health of government finances. But while the Swedish government has largely stuck to its surplus goal by being disciplined with finances, Canada’s current federal government has consistently disregarded its own commitments. Indeed, it has violated its own fiscal anchors several times since 2015, and rather than adopt the discipline necessary to get back on track, the government simply moves the goalposts.

Simply put, Swedes have learned their lesson from their experience in the 1970s to 1990s, whereas Canadians appear to have forgotten. This raises the question—do Swedes have better memories?

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Business

Canada may escape the worst as Trump declares America’s economic independence with Liberation Day tariffs

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MXM logo  MxM News

Quick Hit:

On Wednesday, President Trump declared a national emergency to implement a sweeping 10% baseline tariff on all imported goods, calling it a “Declaration of Economic Independence.” Trump said the tariffs would revitalize the domestic economy, declaring that, “April 2, 2025, will forever be remembered as the day American industry was reborn.”

Key Details:

  • The baseline 10% tariff will take effect Saturday, while targeted “reciprocal” tariffs—20% on the EU, 24% on Japan, and 17% on Israel—begin April 9th. Trump also imposed 25% tariffs on most Canadian and Mexican goods, as well as on all foreign-made cars and auto parts, effective early Thursday.

  • Trump justified the policy by citing foreign trade restrictions and long-standing deficits. He pointed to policies in Australia, the EU, Japan, and South Korea as examples of protectionist barriers that unfairly harm American workers and industries.

  • The White House estimates the 10% tariff could generate $200 billion in revenue over the next decade. Officials say the added funds would help reduce the federal deficit while giving the U.S. stronger leverage in negotiations with countries running large trade surpluses.

Diving Deeper:

President Trump on Wednesday unveiled a broad new tariff policy affecting every imported product into the United States, marking what he described as the beginning of a new economic era. Declaring a national emergency from the White House Rose Garden, the president announced a new 10% baseline tariff on all imports, alongside steeper country-specific tariffs targeting longstanding trade imbalances.

“This is our Declaration of Economic Independence,” Trump said. “Factories will come roaring back into our country — and you see it happening already.”

The tariffs, which take effect Saturday, represent a substantial increase from the pre-Trump average U.S. tariff rate and are part of what the administration is calling “Liberation Day” for American industry. Reciprocal tariffs kick in April 9th, with the administration detailing specific rates—20% for the European Union, 24% for Japan, and 17% for Israel—based on calculations tied to bilateral trade deficits.

“From 1789 to 1913, we were a tariff-backed nation,” Trump said. “The United States was proportionately the wealthiest it has ever been.” He criticized the establishment of the income tax in 1913 and blamed the 1929 economic collapse on a departure from tariff-based policies.

To underscore the move’s long-anticipated nature, Trump noted he had been warning about unfair trade for decades. “If you look at my old speeches, where I was young and very handsome… I’d be talking about how we were being ripped off by these countries,” he quipped.

The president also used the moment to renew his push for broader economic reforms, urging Congress to eliminate federal taxes on tips, overtime pay, and Social Security benefits. He also proposed allowing Americans to write off interest on domestic auto loans.

Critics of the plan warned it could raise prices for consumers, noting inflation has already risen 22% under the Biden administration. However, Trump pointed to low inflation during his first term—when he imposed more targeted tariffs—as proof his strategy can work without sparking runaway costs.

White House officials reportedly described the new baseline rate as a guardrail against countries attempting to game the system. One official explained the methodology behind the reciprocal tariffs: “The trade deficit that we have with any given country is the sum of all trade practices, the sum of all cheating,” adding that the tariffs are “half of what they could be” because “the president is lenient and he wants to be kind to the world.”

In addition to Wednesday’s sweeping changes, Trump’s administration recently imposed a 25% tariff on Chinese goods tied to fentanyl smuggling and another 25% on steel and aluminum imports—revoking previous carve-outs for countries like Brazil and South Korea. Future tariffs on semiconductors, pharmaceuticals, and raw materials such as copper and lumber are reportedly under consideration.

Trump closed his remarks with a message to foreign leaders: “To all of the foreign presidents, prime ministers, kings, queens, ambassadors… I say, ‘Terminate your own tariffs, drop your barriers.’” He declared April 2nd “the day America’s destiny was reclaimed” and promised, “This will indeed be the golden age of America.”

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2025 Federal Election

Three cheers for Poilievre’s alcohol tax cut

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By Franco Terrazzano

The Canadian Taxpayers Federation applauds Conservative Party Leader Pierre Poilievre’s commitment to end and reverse the alcohol escalator tax.

“Poilievre just promised major alcohol tax cuts and taxpayers will cheers to that,” said Franco Terrazzano, CTF Federal Director. “Poilievre’s tax cut will save Canadians money every time they have a cold one with a buddy or enjoy a glass of Pinot with their better half and it will give Canadians brewers, distillers and wineries a fighting chance against tariffs.”

Today, federal alcohol taxes increased by two per cent, costing taxpayers about $40 million this year, according to Beer Canada.

Poilievre announced a Conservative government “will axe the escalator tax on wine, beer and spirits back to 2017 levels, ending the automatic annual tax increases.”

The alcohol escalator tax has automatically increased excise taxes on beer, wine and spirits every year, without a vote in Parliament, since 2017. The alcohol escalator tax has cost taxpayers more than $900 million since being imposed, according to Beer Canada.

Taxes from multiple levels of government account for about half of the price of alcohol.

Meanwhile, tariffs are hitting the industry hard. Brewers have described the tariffs as “Armageddon for craft brewing.”

“Automatic tax hikes are undemocratic, uncompetitive and unaffordable and they need to stop,” Terrazzano said. “If politicians think Canadians aren’t paying enough tax, they should at least have the spine to vote on the tax increase.

“Poilievre is right to end the escalator tax and all party leaders should commit to making life more affordable for Canadian consumers and businesses by ending the undemocratic alcohol tax hikes.”

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