How Spending Cuts – Not Higher Taxes – Saved Canada

When Jean Chretien became prime minister in 1993, Canada faced a fiscal and economic breakdown. The government's share of the economy had climbed to 53 per cent in 1992, from 28 per cent in 1960. The new administration slashed spending. Unemployment benefits were cut by nearly 40 per cent. The ratio of spending cuts to tax increases was nearly 7-to-1. Federal employment was reduced by 14 per cent. Canada's national railway and air-traffic-control system were privatised. The economy rebounded, says Fred Barnes, executive editor of the Weekly Standard.

Between 1995 and 1998, a $36.6 billion deficit turned into a $3 billion surplus.

Canada's debt-to-GDP ratio was cut in half in a decade.

Canada now has faster economic growth than America (3.3 per cent in 2010, compared to 2.9 per cent in the U.S.), a lower jobless rate (7.2 per cent in June, when the U.S. rate was 9.2 per cent), a deficit-to-GDP ratio that's a quarter of that of the US, and a stronger dollar.

Today the United States is in a situation almost identical to Canada's in the 1990s. Government spending is surging, a huge deficit and national debt are setting peacetime records, interest payments are soaring, the economy is stagnant, and unemployment is stuck at around 9 per cent, says Barnes.

It's increased spending that is largely responsible for deficits exceeding $1 trillion for three consecutive years.

Thus the rise in the national debt's percentage of GDP from 40 per cent in 2008 to 62 per cent in 2011 and toward an estimated 72 per cent next year.

The public, in the 2010 election and in poll after poll, is insisting on spending cuts.

Source: Fred Barnes, How Spending Cuts-Not Higher Taxes-Saved Canada, The Wall Street Journal, July 21, 2011

For text: http://online.wsj.com/article/SB10001424053111903554904576457880527361612.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 02 August 2011