Advancing a Free Society

Northern Exposure

Thursday, June 2, 2011

Imagine this scenario: a federal government runs a large deficit. The deficits are so large, in fact, that the ratio of federal debt to Gross Domestic Product approaches 70 percent. Meanwhile, voters have gotten used to large federal spending programs. Does that sound like the United States?

Well, yes. But it also describes Canada in 1993. Yet, just 16 years later, Canada’s federal debt has fallen from almost 70 percent to only 29 percent of GDP. Moreover, every year between 1997 and 2008, Canada’s federal government had a budget surplus. In one fiscal year, 2000-2001, its surplus was a whopping 1.8 percent of GDP. If the U.S. government had such a surplus today, that would amount to a cool $263 billion rather than the current deficit of over $1.5 trillion.

How did the Canadian government manage such a turnaround? Since Canada is, to an extent, a more-socialist and higher-taxed country than the United States, you might expect its government to have relied on tax increases—but it didn’t. About 85 cents of every dollar of deficit reduction was achieved with spending cuts. Beyond that, the government didn’t pull every politician’s favorite trick of cutting just the growth rate of government spending. It cut absolute spending on many programs in dollar terms. And because the inflation rate, though low, was greater than zero, these cuts in dollar terms were even larger in inflation-adjusted dollars.

Because of the years of spending cuts, federal spending on programs—that is, all spending except for interest on the federal debt—fell from a high of 17.5 percent of GDP in 1992-93 to 11.3 percent in 2000-01. Prominent Canadian economist Thomas Courchene noted correctly that this was the lowest percent " in more than half a century."

Continue reading David Henderson in Defining Ideas