Federal finances

By 1995, the federal government had been spending more than it collected in revenues for 25 consecutive years. That year, the deficit (the amount by which government spending exceeds revenues in any given year) was $37.5 billion. As a result of persistent deficit financing, Canada's total debt load (the accumulation of all past deficits and surpluses since Confederation) had grown from $20 billion in 1971 to an all time high of $588 billion by 1996/97. By 1994/95, covering the interest costs alone was costing Canadians $42 billion—more than the annual deficit and some 26% of the entire federal budget.

In 1994, the federal government undertook a massive program to reverse the nation's financial course. Because of a reduction in program spending and a growing economy, Canada was well on its way to achieving a financial turnaround before the decade ended. By 1997/98, the government recorded a surplus for the first time in 28 years. The following year marked the first back-to-back surplus in almost 50 years. With consecutive surpluses continuing well into the new century, the net federal debt had been reduced to $526 billion by 2002/03.

Surpluses have allowed the government to direct more money toward paying off the accumulated debt. As a result, the cost of paying interest on the debt has dropped from a high of 33 cents of every dollar of revenue collected by the federal government in 1995/96 down to 19 cents in 2001/02. Another promising sign is the decrease in the debt-to-GDP ratio, which gives a picture of the size of a nation's debt in relation to the size of its economy. Though still high by historical and international standards, Canada’s debt-to-GDP ratio had fallen from 70.6% in 1995/1996 to 47.7% in 2001/02.

Federal government revenue fell to $190 billion in 2002/03, down from $192 billion in 2001/02. This second straight decline was due in part to a drop in personal income taxes, explained largely by weakness in the stock market. As well, corporate income taxes dropped, reflecting a weak profit performance in the previous year.

At the same time, federal government expenditures decreased, albeit marginally, from $185 billion in 2001/02 to $184 billion in 2002/03. The slowing in federal spending was partly due to a $3.8 billion drop in federal debt charges, including lower interest on government debt. Federal agricultural subsidies and compensation to airlines also decreased. The lower compensation to airlines occurred as their operating conditions recovered following the events of September 11, 2001.