Crowley: Deficit Reduction Lessons From Canada

Posted October 15, 2012 at 3:39pm

With the selection of Rep. Paul Ryan as Mitt Romney’s running mate, the debate over America’s fiscal challenge now hovers like Banquo’s ghost over November’s election. Two plans are on the table to respond to that challenge: the Bowles-Simpson Commission’s report and the 2013 House Budget Resolution, known as the “Ryan plan.” 

While many commentators denounce such plans as too draconian and politically unrealistic, Canada faced a debt crisis in the mid-1990s and adopted fiscal reforms that were far more muscular than what is proposed by Bowles-Simpson or Ryan. Canada shows the budget can be balanced in a few years, not decades, without jeopardizing the economic recovery or gutting the welfare state, as many critics fear.

In the mid-1990s the Canadian budget had been in deficit for two decades. A third of all revenue was being frittered away on interest on the debt. A Wall Street Journal editorial from Jan. 12, 1995, declared the country “has now become an honorary member of the Third World in the unmanageability of its debt problem.”

Deliverance came when the center-left Liberal government tabled its budget in February 1995. This document was a defining moment in Canada’s fiscal history.

More astonishing than the bold plans for a rollback was that Canadians did what they said. Total Canadian federal government spending fell by more than 7 percent over two years, while program spending (excluding interest) fell by almost 10 percent. As a share of the economy, federal spending fell from almost 22 percent to
19 percent during the same period. By January 1998, federal employment was down by 51,000, a drop of 14 percent. 

Ottawa ran 11 consecutive surpluses beginning in 1997-98. With the federal government paying down debt and the economy expanding, total public debt plummeted over the following decade.

To take the full measure of Canada’s achievement, compare it with Bowles-Simpson and Ryan. Bowles-Simpson doesn’t ever cut absolute federal spending relative to the year before implementation. The Ryan plan does propose actual spending cuts from the status quo, but not nearly as vigorous as Canada’s. 

By the fourth year of reform, total Canadian federal spending was still slightly less than it had been the year before reform. In contrast, in the fourth year of its projections, the Ryan plan anticipates spending almost 2 percent greater than its year-zero baseline, while Bowles-Simpson projects spending more than 10 percent greater. By the 10th year of reform, Bowles-Simpson projects federal spending to stabilize around 22 percent of gross domestic product. The Ryan plan aspires to reduce spending to just less than 20 percent in the 10th year.

Canada’s federal spending went from 21.5 percent of GDP in 1994 to 15.2 percent in 2004. The allegedly draconian Ryan plan calls for medium-term spending almost a third higher than the Canadian government actually accomplished.

Finally we come to the deficit and debt. In a mere two years, the Canadian government transformed a $32 billion deficit (4 percent of GDP) into a surplus of $2.5 billion. In contrast, neither Bowles-Simpson nor House budget resolutions even attempt to balance the budget in the medium term; they simply stabilize the federal deficit at about 1 percent of GDP. The Ryan plan explicitly calls for more red ink in each of the next 27 years.

These inadequate plans are all premised on the notion that reining in out-of-control public spending is painful and politically dangerous and must be approached defensively and fearfully. Canada’s experience was quite different. Once politicians explained why reform was indispensable, it was cheered on by the voters. Reforming governments, of whatever stripe, were consistently re-elected. 

The U.S. faces a serious fiscal crisis, as all sides are beginning to recognize. The rather timid response of the two political parties is based on an underestimation of both the appetite of the voter for fiscal responsibility and an overestimation of the pain required to fix the problem. 

As Canada shows, bold and skillful politicians can take a plan far more rigorous than Bowles-Simpson or Ryan and turn it into a recipe for political and economic success. Americans know how bad the situation is; like Canadians, they might actually appreciate political leaders who acknowledge reality and deal with the budget as adults.

Brian Lee Crowley is managing director of the Macdonald-Laurier Institute.