A Canadian official who did it: Cutting deficit no easy task

(CNN) -- When Paul Martin became finance minister of Canada in 1993, the government was spending itself into a deep hole. Its spiraling debt was prompting observers to compare it to a Third World country. Martin unveiled budgets that steeply cut the $42 billion deficit and eliminated it in four years without long-term damage to the economy.

The example of Canada has been cited and debated as governments in developed countries around the world are looking for ways to cut spending and reduce the size of their debts. Britain has embarked on sweeping spending cuts with an eye toward Canada as a model. In the United States, the midterm elections focused attention on the size of the budget deficit.

Martin, a Liberal Party member who later became prime minister, says lessons can be learned from his nation's experience, though he says many differences exist between Canada's situation in the 1990s and the U.S. economy today.

For one thing, the U.S. is now recovering from the most serious recession in decades. He accepts the view of many economists that the U.S. economy is too fragile for deep spending cuts now, but believes there should be progress on a medium-term plan to cut the deficit.

Martin spoke to CNN earlier this month; here is an edited transcript:

CNN: Can you describe the state of Canada's finances when you became minister of finance in 1993?

Paul Martin: We had the worst deficit, the worst debt-to-GDP ratio of any of the G-7 countries, with the exception of Italy. In fact, financial commentators were making frequent references to us as a Third World country. We were at that point where the inexorable effect of increasing compound interest was pushing us closer and closer to the debt wall.

In fact, we were in a debt spiral and some 45 percent and rising of our national debt was held in foreign hands. At the same time, we had an unfunded liability in the Canada pension plan, which is our national pension plan, which was greater than our national debt. And we were under some pressure to deregulate our banking system to follow what was going on in other countries such as the United States, the United Kingdom and continental Europe.

CNN: And what did you do?

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