I stumbled across an interesting piece this week that was posted on the Cato Institute website back in May of this year. The author, Chris Edwards, explains how the solution to our fiscal problem may be as simple as following the same plan Canada implemented in the 1990s.
In the mid 1980s Canada was in a fiscal situation similar to where we find ourselves today; two decade of out of control spending had left them with huge debts. Inflation and unemplyment were high, and growth was low. Over the next decade the Canadian government implemented a series of reforms that drastically changed the fiscal situation in the country.
The first reform was to privatize many of the "crown corporations" like Air Canada, Petro-Canada, and Canadian National Railways. Privatization of about two dozen of these corporations helped reduce total government debt. Maybe the US could fully privatize the USPS?
Cutting spending was a huge part of the plan to reverse the fiscal outlook in Canada during the 1990s. In 1995, the Prime Minister cut noninterest spending by 10%, the equivalent of cutting $340B from our current budget. (In a single year) Unlike "cuts" in the US that are simply reductions in growth, these were actual baseline cuts to defense, unemployment insurance, transportation programs, business subsidies, aid to the provinces, and a number of other programs.
As a result of the cuts, spending fell from 22% of GDP to 17% between 1995 to 2000 and was down to 15% by 2006. Federal spending in the US sits at about 25% of GDP. The cuts also allowed the Canadian government to balance the budget from 1998 until the recession of 2008 and reduce the total debt from 68% of GDP to under 34% of GDP. Total US debt now exceeds 100% of our GDP.
In the last decade, the surpluses that resulted from the smaller budget allowed Canada to make significant tax cuts across the board. Income tax rates have been lowered and the income brackets have been adjusted for inflation, and corporate taxes were lowered from 29% to 15%. This year the Canadian government expects to collect 1.5% of GDP at a 15% corporate tax rate while the US expects to collect just 1.6% of GDP at a 35% corporate tax rate.
Part of the success of the Canadian reforms should be credited to their federalist structure that puts greater power in the provinces. In Canada, only 38% of total government spending is federal, 62% is at the provincial and local levels. In the US, 71% of total government spending is federal, with state and local spending only amounting to 29%.
One example of where that makes a difference is in education; Canada has no federal equivalent of the Department of Education. School funding and regulation is left to the provinces and localities...and Canadian students routinely test higher than their US counterparts.
While the Canadian system is not perfect, and there is always room to improve, the lessons learned from their reforms should not be wasted. If the US is serious about getting out fiscal house in order, we need to start looking to some other countries that have managed to turn things around.
Please read the full article at the link below:
http://www.cato.org/policy-report/mayjune-2012/we-can-cut-government-canada-did