NCPA - National Center for Policy Analysis

Welfare States Cutting Budget Deficits

October 16, 1995

Canada and Sweden are known for their generous social welfare programs, purchased at the cost of high taxes and, more recently, mounting government debt and budget deficits. Both countries are fighting their way back from the budgetary brink by cutting government expenditures.

The United States is in a better fiscal position than either Canada or Sweden. The U.S. has an estimated budget deficit for 1995 of $161 billion, or 2.3% of Gross Domestic Product (GDP), and a federal debt totaling 52% of GDP. In contrast:

  • Canada's national debt, which totaled less than 17% of GDP in 1975, began swelling after the 1981-82 recession until it now stands at 75% of GDP.
  • Sweden's public debt doubled in the early 1990s, unemployment tripled and the budget deficit increased tenfold to 10% of GDP in 1994, the worst among all industrialized nations.

In Canada, the liberal government elected in 1993 pledged to cut the budget deficit from 6% to 3% of GDP in three years. To do so:

  • Discretionary spending will fall to 10% below the 1993 level and business subsidies are getting sliced by 60%.
  • The government's payroll will decline by 15%, and some department budgets have been cut in half.
  • The current system of financing Canada's national health care system will be replaced by block grants to the provinces, designed to shrink overall health spending from 10% of GDP to 8.5%.

By the time the full program is enacted, Canada's federal government, in terms of percentage of GDP, will be as small as it was in the 1950s.

Sweden is an even more extreme case, with a tax burden of 63% of GDP, compared to 31% for the U.S. Its standard of living, once the highest in Europe, has fallen behind France and Italy.

  • The Swedish government elected in 1994 is cutting spending on welfare, pensions, health insurance, unemployment, family assistance and child allowances.
  • The budget deficit in Sweden will fall by 3.5% of GDP this year alone, with additional cuts of 4% of GDP over the next three years, for a total reduction of 7.5%.

Both countries have credible plans for reducing their deficits to zero over a much shorter period of time than the U.S. Congress is proposing.

Source: Rob Norton, "The Baddest Budget Cutters," Fortune, October 16, 1995.

 

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