It seems very likely that - for the tenth consecutive year - the federal government will run a healthy surplus in FY2006-07. For those of a certain age, it is perhaps difficult to believe that large surpluses have become a standard feature of the economic policy background. How did this happen?

It's now been so long since deficits were a problem that even their scale is diminished by distance. A deficit of - say - $37b would be viewed as a serious problem even now. But in 1985, when we actually hit those depths, the problem was much worse. Since 1985, the economy - and therefore our ability to generate tax revenues - has grown, and inflation has eroded the real effect of a nominal deficit measured in the tens of billions of dollars. There many ways of providing a scale to the numbers that follow. I'll use two: per cent of GDP, and per capita 2006 dollars. (It turns out that it actually does make a difference which one you use.)

First up is the federal surplus/deficit:



By any measure, the scale of the deficits that ran for the span of a generation were huge. And the arithmetic of deficits and debts took its remorseless toll:

Not that the deficit was completely ignored for a generation. If you look at the operating surplus (the difference between revenues and program expenditures, without debt charges included) there were a couple of serious attempts to deal with the deficit, but they fell victim to the recessions of 1983 and 1991:

Even though the operating budget stayed in surplus during a severe recession in the early 90's, the deficit still continued to rise as debt service charges rose. The Bank of Canada's attack on inflation - and the high interest rates that accompanied it - didn't help:



By the time the Liberals took power in 1993, debt service charges alone were on the order of $2000 per capita in terms of 2006 buying power. The turning point came in Paul Martin's 1995 budget, and the measures it introduced produced a surplus within two years. How did they do it? Spending cuts or tax increases?

If you look at a graph of program spending and revenues, you'd conclude that taxes went up, while spending stayed the same. Real per capita program spending is pretty much where it was 25 years ago, but we're paying $2000 more per capita for them:



But if you look at GDP shares, you'd conclude that revenues stayed fairly steady at around 16%, while program spending has fallen by 4 percentage points since the mid-90's.





After ten years of surpluses, we can perhaps breathe a little easier. The debt is less and less of a burden, and the cost of servicing it is almost back to what it was in the 1960s. So now that the deficit is not the burning preoccupation it once was, we can start thinking of other priorities. Do we look at the second-last graph and decide to cut taxes? Or do we look at the last picture and decide to increase spending?

Update: See also this post, which updates these numbers up to the 2009-10 fiscal year.