Canadian Advice the United States Should Follow

June 4, 2013

Two decades ago, Canada suffered a deep recession and teetered on the brink of a debt crisis caused by rising government spending. However, Canada reversed course and cut government spending, balanced its budget, and enacted pro-market reforms. Today, the United States is in as bad or worse fiscal shape than Canada was. U.S. leaders need to make major fiscal and economic reforms, and they can learn many lessons from Canadian efforts to restrain government and create a more competitive economy, says Chris Edwards, the director of tax policy studies at the Cato Institute.

Canada veered sharply left in the late 1960s, beginning a 16-year spending binge and expansion of the welfare state. It expanded programs, raised taxes, nationalized businesses and imposed barriers to international investment. Canada also suffered from high inflation during the 1970s and early 1980s.

In response to its faltering economy, Canada reduced trade barriers, privatized businesses and slashed its corporate tax rate. The economy boomed, unemployment plunged and the formerly weak Canadian dollar soared to reach parity with the U.S. dollar.

  • 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 other major reform of the late 1980s was the free trade agreement with the United States. The success of the agreement has been a powerful force in reorienting Canada toward market-based policies.

In the first Liberal budget in 1994, Finance Minister Paul Martin provided some modest spending restraint. But in his second budget in 1995, he began serious cutting.

  • In just two years, total noninterest spending fell by 10 percent, which would be like the U.S. Congress chopping about $330 billion from this year's noninterest federal spending of $3.3 trillion.
  • When U.S. policymakers talk about "cutting" spending, they usually mean reducing spending growth rates, but the Canadians actually spent less when they reformed their budget in the 1990s.
  • The spending reforms of the 1990s allowed the Canadian federal government to balance its budget every year between 1998 and 2008.
  • Canada's score on "economic freedom" in the Fraser Institute's Economic Freedom of the World report is now higher than the score for the United States.

The U.S. Congress could learn substantially from the successes of Canadian policymakers, and they could easily bring the United States out of its economic rut.

Source: Chris Edwards, "Canada's Fiscal Reforms," Cato Institute, Spring/Summer 2013.

 

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