The Corner

Canada Cut Spending and So Should We

Chris Edwards has a good Cato Policy Report this month explaining how Canada went from a free-market economy to socialism and back. The whole thing is worth reading but here is a tidbit:

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 non interest spending fell by 10 percent, which would be like the U.S. Congress chopping $340 billion from this year’s non interest federal spending of $3.4 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 Canadian government cut defense, unemployment insurance, transportation, business subsidies, aid to provincial governments, and many other items. After the first two years of cuts, the government held spending growth to about 2 percent for the next three years. With this restraint, federal spending as a share of GDP plunged from 22 percent in 1995 to 17 percent by 2000. The spending share kept falling during the 2000s to reach 15 percent by 2006, which was the lowest level since the 1940s.

He has a chart comparing spending as a share of GDP in the U.S. and Canada. It doesn’t look good:

In recent years, spending spiked upward in both countries because of the recession, but while U.S. spending remains at elevated levels, Canadian spending is now back down to 15.9 percent of GDP and is expected to fall further in the government’s current forecast.The spending reforms of the 1990s allowed the Canadian federal government to balance its budget every year between 1998and 2008. The government’s debt plunged from 68 percent of GDP in 1995 to just 34percent today. In the United States federal debt held by the public fell during the 1990s,reaching a low of 33 percent of GDP in2001, but debt has soared since then to reach more than 70 percent today.

Data from the Organization for Economic Cooperation and Development show that total federal, provincial, and local government spending in Canada plunged from a peak of 53 percent of GDP in 1992 to just39 percent by the mid-1990s. In 2012, spending will be 42 percent of GDP, which compares to total government spending in the United States of 41 percent. Government spending in both countries is too high, but Canada has at least been moving in the right direction on fiscal reforms.Aside from budget cuts, Canada improved

As Edwards notes, the Canadian government is still too large, but it seems that the country isn’t done reforming yet. In the last ten years, Canada reduced its marginal tax rate on capital gains, indexed tax brackets to inflation, created a Roth IRA–type savings account, and more.

His piece is here. Also it is worth reading (or reading again) David Henderson’s piece about the spending-cut approach to debt reduction in Canada.

Come on America — if Canada did it, so can you!

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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