Looking north for economic inspiration.
Jun 7, 2010, Vol. 15, No. 36 • By FRED BARNES
Canada was called an “honorary member of the Third World” by the Wall Street Journal in 1995, and for good reason. Out-of-control spending, soaring debt, and the government’s bite of the country’s gross domestic product (GDP) growing at a furious pace—those trends prompted the Journal’s harsh putdown. Sound familiar? Those are exactly the trends that endanger America’s economy and standard of living today.
Only with Canada there’s a difference. Beginning in the mid-1990s, Canadians came to grips with their fiscal crisis. They cut spending at both the national and provincial (state) level, reduced the size and payroll of government, slashed debt, and produced what Paul Martin, then finance minister and later prime minister, called smaller, smarter government.
Canada is now in a far better economic situation than the United States. Its unemployment rate is lower, its budget deficit breathtakingly smaller (after nearly a decade of balanced budgets), its debt burden far lighter, its banks more stable. The Canadian dollar, once worth as little as .62 cents, is currently nearly at parity with the American dollar.
While not quite gloating, Canadians are eager to tout their comparative advantage. The authors of the new book The Canadian Century: Moving Out of America’s Shadow wrote in the National Post last week: “If the United States continues on its current course, Canada will find itself without peer as a magnet for investment, immigrants, innovation, and growth.” Had he been invited to President Obama’s “jobs summit” last December, David Frum, a Canadian and prominent political commentator who lives in Washington, said he “would have advised: Learn from Canada.”
One lesson from Canada is that major fiscal reform requires bipartisanship, with the initiative better coming from liberals than conservatives. It was the left-of-center Liberal party, facing what Frum describes as “nightmarish debt and deficits,” that led the way with an austere budget in 1995. Conservatives, divided at the time, were supportive.
There’s a simple explanation for the need for liberal leadership. If conservatives propose to cut spending and downsize government, reflexive liberal opposition can be expected. But if liberals advocate a similar approach, they’re likely to be supported by many of their liberal allies and by almost all conservatives.
At least that’s the way it worked in Canada, with impressive results. In Washington, however, the liberals in charge—that is, President Obama and Democrats in Congress—are moving in the opposite direction. Rather than retrench, they want to spend and borrow more. America “seems stuck in sterile partisanship,” says Brian Lee Crowley, one of the authors of The Canadian Century.
Or perhaps it’s because the United States hasn’t reached the dire situation that Canada faced in the early 1990s after years of breakneck spending and borrowing. Government and public debt combined reached 53 percent of GDP in 1992, and Canada’s future looked grim. The d-word was increasingly mentioned—default.
The national debt had doubled since the 1960s. Federal spending had jumped from 15 percent to 23 percent and spending by the provinces had skyrocketed as well. Borrowing was the second largest source of government revenue. Productivity growth was slow, but unemployment, like the government, was growing. Canadians were becoming panicky.
After the Liberal party took office in 1993, their first budget failed to improve the desperate fiscal plight. Surprisingly, the left-wing government of a western province, Saskatchewan, showed the way by cutting spending and balancing its budget. In the next national budget, finance minister Martin declared, “We are acting on a new vision of the role of government . . . smaller government . . . smarter government.”
Taxes remained relatively high, but it was deep spending cuts that led to balanced budgets from 2000 until the crisis of 2008 hit. There were sharp cuts in regional development, scientific work, transportation, industry, and especially in transfer payments to provinces. “The provinces took the cue,” says economist Ross McKitrick, and made spending reductions of their own. Another significant cut was in the government workforce.
The results have been remarkable. In two years, spending declined 8.8 per-cent. The size of the national government dropped from 16 percent of GDP in 1994 to 13 percent. As debt shrunk, once-gigantic interest payments fell dramatically.
That’s not all. Canada’s version of Social Security was put on a sound financial footing. Only one large government entity with soaring costs has been left unreformed: the single-payer health care system.