Nick Rowe has a post where he points out that the outgoing Conservatives did not abandon Keynes during the Great Recession. He takes a graph of government spending from an article by Matthew Klein, but we can make the same point be looking at the underlying primary balance. (As I have noted many times, no measure of fiscal stance is ideal. If you want a more detailed analysis of the Canadian macro position than I will give here, read the Klein article.) According to the OECD, this moved from a surplus of 2% of GDP in 2006 to a deficit of 3.2% of GDP in 2010. We saw a similar countercyclical swing in fiscal policy in the US, but whereas that swing was sharply put into reverse in the US, in Canada the deficit was still 1.8% in 2013. (The UK was like the US except the peak deficit was in 2009, and the reverse was well under way by 2010.)
So we saw a classic Keynesian fiscal policy in Canada. Partly as a result, Canadian GDP only fell by 2.7% in 2009 and grew strongly in the next two years. That in turn meant that short interest rates only stayed on their floor for just over a year, and rose to 1% during 2010. So it all looks like a textbook New Keynesian policy, and close to the one recommended in Portes and Wren-Lewis: fiscal expansion helped get interest rates above their lower bound.
That was then. More recently GDP has been falling, and interest rates have been cut to 0.5%. So is it time for a tight fiscal policy, or instead some additional deficit financed public investment? Ask the man on the escalator, the new Canadian Prime Minister. In the election Trudeau played a classic Keynesian card (Labour leadership please note). Both his two opponents criticised this deviation from a balanced budget policy. Trudeau won, so Keynes remains in Canada. While interest rates may not have yet hit their lower bound, it makes sense to borrow to invest when rates are low and when there is a significant risk rates could hit ‘zero’ (Osborne please note).
Unlike governments in Europe and the US, Canada did not dash for austerity just as the recovery was beginning and while interest rates were still on their floor. They had a clear choice a week ago to allow a deficit to finance investment or go for a balanced budget, and they chose the more sensible fiscal policy. I think there are two lessons beyond Canada. First, right wing governments do not have to make major macroeconomic policy mistakes with fiscal policy. Second, voters do not always suffer from deficit fetishism.