We Can Cut Government: Canada Did

May 30, 2012

Two decades ago Canada suffered a deep recession and teetered on the brink of a debt crisis caused by rising government spending.  Since then, the country has undergone a remarkable recovery, reclaiming financial strength and harnessing a powerful economic boom.  The United States would do well to learn what it can from Canada's experience and adopt its pro-growth policies, says Chris Edwards, director of tax policy studies at the Cato Institute.

The origins of Canada's problem lie within an incredible spending binge that began in the late 1960s and lasted for 16 years.

  • The Canadian leader during most of that time, Pierre Trudeau, expanded programs, raised taxes, nationalized businesses and imposed barriers to international investment.
  • Government spending as a portion of gross domestic product (GDP) skyrocketed during this period, as did the federal government's total debt level.
  • Canada also suffered from high inflation during the 1970s and early 1980s.

This growing problem was addressed first by a series of pro-market reforms throughout the 1980s and 1990s, inspired in part by comparable programs instituted by Ronald Reagan and Margaret Thatcher.

  • In the mid-1980s, the Canadian central bank adopted a goal of price stability, which greatly reduced inflation and has kept it low and stable ever since.
  • Following U.S. tax reforms in 1986, Canada enacted its own income tax cuts under Progressive Conservative Prime Minister Brian Mulroney.
  • The government privatized Air Canada in 1988, Petro-Canada in 1991 and Canadian National Railways in 1995.
  • All in all, Canada privatized about two dozen "crown corporations" in the late 1980s and early 1990s.
  • The other major reform of the late 1980s was the free trade agreement with the United States.

The market reforms were accompanied by substantial spending cuts in the late 1990s that finally got Canada's fiscal house in order.

  • Between 1994 and 1996, the Canadian government cut defense, unemployment insurance, transportation, business subsidies, aid to provincial governments and many other items.
  • As a result, total noninterest spending fell by 10 percent.
  • With this restraint, federal spending as a share of GDP plunged from 22 percent in 1995 to 17 percent by 2000.
  • These spending reforms allowed Canada to balance its budget every year from 1998 to 2008.

Source: Chris Edwards, "We Can Cut Government: Canada Did," Cato Policy Report, May/June 2012.

For text:

http://www.cato.org/pubs/policy_report/v34n3/cprv34n3-1.pdf

 

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