Canada’s budget triumph

From a new paper by David Henderson:

A federal government runs a large deficit. Deficits are so large that the ratio of federal debt to Gross Domestic Product (GDP) approaches 70 percent. A constituency of voters have gotten used to large federal spending programs. Does that sound like the United States? Well, yes. But it also describes Canada in 1993. Yet, just 16 years later, Canada’s federal debt had fallen from 67 percent to only 29 percent of GDP. Moreover, in every year between 1997 and 2008, Canada’s federal government had a budget surplus. In one fiscal year, 2000–2001, its surplus was a whopping 1.8 percent of GDP. If the U.S. government had such a surplus today, that would amount to a cool $263 billion rather than the current deficit of more than $1.5 trillion.

Comments

So is the Keynesian explanation that Bush's deficit spending and tax cuts allowed Canada's austerity to not wreck their economy during 2000-2002?

the henderson article is right that there was a strong centrist concensus to do something about the ballooning federal debt by the early 1990s but is utterly misleading when it says there were no tax increases to pay for this. Maybe no increases at the federal level (we will not count the then extraordinary increases in the tax on alcohol and tobacco; the loss of a child tax credit for people above the poverty line; etc) but the feds greatly reduced transfer payments to the provinces which then reduced what they gave municipalities who in turn covered their shortfall with huge increases in property taxes. It was therefore the middle class which both demanded that something be done and directly paid for it.

There seems to be no stomach for this among the present middle class in the united states

...and helping spur Chinese mining investment in Afghanistan.

Plus they have their health care spending somewhat better under control.

One word: oil.

petro-rents distributed over a small population with generally "western" government = success. Call it norway, canada, what have you

ahhh, for full and adult discussn of debt/GDP for canada, pls also include the provincial debt outstanding - as former colonies of the british crown they started off as entities that could run deficits - they did not cede this right when they joined canada (or joined to become canada, in the case of originating provinces) - full disclosure and all....

Travers,

I get you. What Tyler is saying is that 10 years ago we should have had a tax increase and cuts in spending so that we would be in a better position now.

Got it. It wasn't clear at first, but now I see the light. We shouldn't have had those tax cuts. But, we did have two unfunded wars and Canada didn't. Does that count? I mean we helped everybody. Maybe we can take up a collection.

"In one fiscal year, 2000–2001, its surplus was a whopping 1.8 percent of GDP"

WOW! The USA only had a budget surplus of 1.3% of GDP in 2000-01. Of course, it had a budget surplus of 2.4% of GDP in 1999-2000.

Sorry to ask a dumb question. Is that the same David Henderson that co-blogs with Arnold Kling?

So all we need to do is implement strong bank lending regulations, manage healthcare at a national level, spend only as much on defense as necessary for actual defense, implement a VAT, have a "conservative" party and business class that's on average further to the left than the American Senator Olympia Snow, mandate bilingual education, refrain from issuing bonds to pay for tax cuts for those least likely to be stimulated either to further productivity or further spending, have a stock market where 30+ percent of all business profits is not being generated by producers of arcane financial "instruments," and become a net exporter of large quantities of petroleum.

And, as A.S. points out, don't elect George W. Bush when you're already running a 2.4% budget surplus built in anticipation of reducing the national debt since you're expecting temporary but large future expenditures in the form of retirement benefits to boomers.

We should probably try that.

figleaf

DanH, a wiki search confirms your statement that the GST tax replaced the previous manufacturing tax and was supposed to be revenue neutral, so it would appear there was not tax increase for this tax.

The IMF seems to disagree with applying the Canadian approach at this time.

As mentioned earlier, if we were to follow Canada, it should have been ten years ago, during a period of world growth.

But, how does imposing austerity now look as a policy. Well, as reported in the Sept 30 Economist, the in a recent paper confronting the austerity to prosperity thesis, the IMF disagrees that it is the policy for this period.

See summary of IMF paper here: http://www.economist.com/node/17147618?story_id=1...

"At the moment, however, there is less scope for these mitigating factors. Interest rates in most rich countries cannot fall much further. And a country cutting its deficit now would not be doing so alone (which would reduce the impact on exports). Simulations carried out by the fund show that slashing spending in an environment where interest rates have no more room to fall doubles the contractionary effect of such cuts compared with a situation where the central bank still has scope to cut rates. In such a situation, GDP can be expected to decline by 1%, rather than the historic average of 0.5%. If, in addition, everyone else is cutting, the effect of a fiscal contraction is further magnified. Most people believe that fiscal consolidations are helpful in the long run. Expecting them to be painless looks like wishful thinking."

Er, that last sentence should read "75% of the seats"...

The middle class entitlements are far less generous and the middle class pays for them. As mentioned, welfare has been cut substantially, health care offers poor service, the Canada Pension plan is meager and taxed back if you have any other income. During the late 80s and 90s government programs were cut and starved. So policing, health, welfare, education, military and infrastructure seriously deteriorated in quality of service and abilities. The GST puts taxation in your face every time you do anything, which is the best of all worlds; a hated tax.

It is worthwhile to note that the federal scaling back of spending followed provincial reforms. British Columbia started in 1984 with a restraint program that removed job protection from civil servants and scaled back government considerably. Alberta followed suit a year or two later. Other provinces did similar. Think Chris Christie.

What is remarkable is how government contracts have gone from gravy train to almost not worth pursuing. In my province most civil servants are contract administrators with tight budgets, with good results.

What most left leaning provincial governments have done is instead of taxing and spending (the shock waves through government when raising taxes reduced revenues was almost amusing to watch) they have imposed social costs on business by regulation. With the difference in provincial fiscal climate we see business moving to more friendly jurisdictions.

Having oil wealth really helps, and the low dollar maintained the manufacturing base over the years when government was scaling back.

Canada was losing their best and brightest to the US for generations. That is starting to change. The tax policies are very attractive for businesses. I think it was David Rosenberg, a canadian financial advisor, who is surprised by the interest from wealthy americans in relocating to Canada. With the inevitable loosening up of the medical business here, and the health care reforms in the US, we may see the 50% or so of Canadian trained doctors stay here instead of heading to the US.

As for timing such things, Canada had no choice. Provinces were issuing bonds in the mid 90's for 16-18%.The interest on the debt was swallowing any revenue increases from taxation.

I would suggest the US not wait till they are forced into that situation.

As for the GST, it probably didn't raise revenue, and the cost to the economy is high compared to the returns. But what it did was open a window for tax collection agencies into businesses where they had very little data previously. So it probably raised revenue indirectly.

I am basking in the wonders of low taxation for businesses. I enjoy a very low corporate tax rate, and with the HST (provincial sales tax changed into a VAT) all my business capital expenses are 7% cheaper.

Derek

In general it was a success born of:

1. Tea Party like movement AKA Reform Party created a threat to the

centerist parties who promptly co opted the fiscal platform.

2. Generally favorable economic times

3. Free trade

4. Tax reform (adoption of a Vat)and other reforms

5. In general government austerity at federal and other

levels of government

6. Electorate was genearly supportive

7. Visible success of the policies

8. Low interest rates helped build the "snowball" debt servicing

costs were moderated by the interest rate environment

9. Liberal platfom was jobs jobs jobs... free trade and the economy

delivered so they became firmly entrenched in power.

10 Socially liberal policy with a fiscally conservative

flavor reflected what the people wanted.

Like everything it was not simple. No excuses though it is very doable

anywhere if there is a willingness to feel the pain. Note there was

pain for the special interests.

For those that say the Loonie "tanked"- can you be more precise? Did it tank vs the dollar, or did it tank vs a basket of currencies? If the former, was it a case of the Loonie tanking, or was it a case of the dollar skyrocketing?

Careless,

What Doc Merlin is saying is that because the US budget is a fiction, and a significant amount of it is off budget, it was a really, really bad idea to do the Bush tax cuts.

I am sure he would agree with me based on his statement.

One point Henderson makes that is quite important is that along the way to fiscal health, Canada tackled its entitlement programs. We got Social Security under control in two ways: We increased the withholding, and we began means-testing benefits through 'clawbacks'. We transformed some of our retirement benefits from a straight paycheck to everyone to a system where there were credits available to the elderly for certain expenses - and then removed those credits for the wealthy elderly.

The U.S. absolutely has to do something similar. Medicare and Social Security need to be at least partly means-tested. Without that, entitlement spending will grow out of control, and the government will be forced to raise taxes to pay for it, and it will just increasingly turn into a massive intergenerational redistribution of wealth. That will kill the U.S. economy.

The U.S. absolutely has to do something similar. Medicare and Social Security need to be at least partly means-tested. Without that, entitlement spending will grow out of control, and the government will be forced to raise taxes to pay for it,

The only difference between means-testing and higher marginal tax rates is that means-testing requires additional bureaucracy. It is a complete waste, as are programs controlling what people buy. Just send everyone a check and TAX

and it will just increasingly turn into a massive intergenerational redistribution of wealth. That will kill the U.S. economy.

Do you think that elderly people deserve to retire keeping a significant fraction of their income ? If so, someone else has to work for them. This can be achieved either through capitalism (lifetime savings generating rent-paying dividends), or tax-based intergenerational redistribution. Ask anyone whose 401k tanked what they think of the first proposal. It is just yet another way to socialize risk.

Redistribution does not kill the economy, quite the contrary, if it's done clevery.

Anonymous describes the political situation accurately. The opposition party set a rather extreme agenda with serious tax cuts and reduction in government spending. This gave the Liberals political room to cut the deficit and look centrist and reasonable.

The Liberals took power after the Conservatives under Mulroney lost all but two seats in the legislature. They had campaigned on getting rid of the hated GST. Once in power they tried the standard infrastructure spending to stimulate the economy. It didn't work. Interestingly, Chretien gave the power of the purse to his Finance minister Paul Martin, who approved or not any government spending. He had a rather unique individual as Deputy Finance Minister, the top civil servant in the department. He had the habit of saying 'bull****' to any of the standard Krugmanesque suggestions on fixing the problem. Martin listened to him, and succeeded at balancing the books.

David Dodge was his name, and he went on to be the Governor of the Bank of Canada, a rough equivalent to the Federal Reserve chairman. He wasn't a raving libertarian at all. http://www.bis.org/review/r070312a.pdf

Derek

The United States has the ability to follow Canada and reverse the budget deficit into a budget surplus; however, this would require huge changes in government spending as the article claims. When the United States is able to clean up after the mess that Bush created bringing us into a war against terror that we never were able to support in the first place, we will be able to cut government spending. There is hope as the Pentagon spending is said to be decreasing during the next five years and members of Congress have been hoping to cut defense spending which could help decrease the federal deficit.

The United States should be less worried about having the strongest military in the world when the economy is continueing to fail. The U.S. will not continue to be a world superpower without fixing the economy in the first place. The United States should be spending more money on ways to help the economy instead of increasing the national debt. Education and health care are far more important than defense spending, for how can a nation defend itself without citizens that are educated and in good health? In addition to cutting government spending, I believe that reallocating some of that spending can additionally help the U.S. failing economy and national debt.

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