Insight: Lessons for U.S. from Canada's "basket case" moment

"I knew we were in a bind and we had to do something," Chretien, 77, told Reuters in a rare interview.

Canada's shift from pariah to fiscal darling provides lessons for Washington as lawmakers find few easy answers to the huge U.S. deficit and debt burden, and for European countries staggering under their own massive budget problems.

"Everyone wants to know how we did it," said political economist Brian Lee Crowley, head of the Ottawa-based thinktank Macdonald-Laurier Institute, who has examined the lessons of the 1990s.

But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth.

It would eventually oversee the biggest reduction in Canadian government spending since demobilization after World War Two. The big cuts, and relatively small tax increases, brought a budget surplus within four years.

Canadian debt shrank to 29 percent of gross domestic product in 2008-09, from a peak of 68 percent in 1995-96, and the budget was in the black for 11 consecutive years until the 2008-09 recession.

For Canada, the vicious debt circle turned into a virtuous cycle which rescued a currency that had been dubbed the "northern peso." Canada went from having the second worst fiscal position in the Group of Seven industrialized countries, behind only Italy, to easily the best.

It is far from a coincidence that the recent recession was shorter and shallower here than in the United States. Indeed, by January, Canada had recovered all the jobs lost in the downturn, while the U.S. has hardly been able to dent its high unemployment.

"We used to thank God that Italy was there because we were the second worst in the G7," said Scott Clark, associate deputy finance minister in the 1990s.