What the United States can learn from its northern neighbor

Niels VeldhuisNiels VeldhuisVice President ResearchVice President Research

The Fraser InstituteThe Fraser Institute

Gus A. Stavros Center for Economic EducationGus A. Stavros Center for Economic Education

Canada's Incredible Canada's Incredible TurnaroundTurnaround

Presentation Outline

Canada 1965-1995: getting off track

Shrinking government

Becoming a top global performer

U.S. looks like Canada pre- 1995

Lessons for the US… and Europe

When Americans look to Canada…

• nice people• a little socialist• higher taxes• free gov’t health care• love their hockey • love their beer• and boy is it cold!

Canada in 1995…

“Turn around and check out Canada, which has now become an honorary member of the Third World in the unmanageability of its debt problem.”

~ Wall Street Journal, January 12th, 1995

Canada’s 1965-95 Experiment:A Fiscal Time-Bomb in the Making

Deficits & Debt Trade Diversion

Increasing Dependency

Higher Taxes

Mounting Debt

Increasing Unemployment

Stagflation

Stagnating InvestmentIncreasing Interest Rates

Rising Inflation

Total Government Spending as a Percent of GDP (1929-1965)

10

15

20

25

30

35

40

45

50

55

Per

cent

of G

DP

US CAN

Federal Revenues and Spending(1961-1993)

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

22.00%

24.00%

26.00%

Per

cent

of G

DP

Spending Revenues

1965:Exp: 15.0%

1992:Exp: 23.5%

Federal Deficit / Surplus(1961-1993)

-7.00%

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

Per

cent

of G

DP

Federal Accumulated Debt(1961-1996)

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Per

cent

of G

DP

1976:35.2%

1996:78.3%

Federal Interest Costs(1961-1994)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

Per

cent

of Tota

l Rev

enues

1974:10.2%

1990:34.6%

1994:30.4%

Provinces Exacerbate Problems

Provincial Revenues and Spending(1961-1994)

5

10

15

20

25

30

Per

cent

of G

DP

Revenues Spending

1965:Rev: 12.7%Exp: 10.7%

1993:Rev: 22.2%Exp: 25.8%

Provincial Deficit / Surplus(1961-1993)

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

Per

cent

of G

DP

Aggregate Provincial Debt(1970-1996)

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

55.00%

Per

cent

of G

DP

1970:15.5%

1980:20.6%

1996:49.7%

Provincial Interest Costs(1961-1995)

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Per

cent

of Tota

l Rev

enues

1977:6.6%

1961:4.4%

1995:14.9%

Total Government Spending as a Percent of GDP (1965-1994)

25

30

35

40

45

50

55

Per

cent

of G

DP

United States Canada

38.5%

53.3%

Rise of Dependency

0

2

4

6

8

10

12

Perc

ent

of th

e P

opula

tion

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Canada

Source: Frenette and Picot (2003); Statistics Canada.

From Basket Case to World Beater

Pressure for Change

• Think Tanks: The Fraser Institute

• Media Pressure

• Broader shift in public opinion

• Hitting the Wall – Is Canada Bankrupt?

• Wall Street Journal’s mocking

• Mexican peso collapse 1994

• The political class finally wakes up

Canada in 1995…

“Turn around and check out Canada, which has now become an honorary member of the Third World in the unmanageability of its debt problem…

If dramatic action isn’t taken in next month’s federal budget, it’s not inconceivable that Canada could be hit the debt wall... it can’t assume that lenders will be willing to refinance its growing debt.”

~ Wall Street Journal, January 12th, 1995

Budget 1995: A new direction for Canada

"We are acting on a new vision of the role of government…smaller government ... smarter government.” ~ Paul Martin Canada’s Finance Minister

“The debt and deficit are not inventions of ideology. They are facts of arithmetic. The last thing Canada needs is another lecture on the dangers of the deficit. The only thing Canadian want is clear action.”

Federal Revenues and Spending(1990-2008)

10%

12%

14%

16%

18%

20%

22%

24%

26%

Per

cent

of G

DP

Spending Revenues

1992:Exp – 23.5%

1998:Exp – 17.9%

2008:Exp – 15.2%

Federal Public Sector Employment

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Military Federal Employees

Federal Deficit / Surplus(1961 -2007)

-8.00%

-7.00%

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

Per

cent

of G

DP

Federal Accumulated Debt(1961-2007)

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Per

cent

of G

DP

1976:35.2%

1996:78.3%

2007:42.7%

Federal Interest Costs(1994-2010)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Per

cent

of R

even

ues

1996-97:29.8%

2009-10:11.4%

The Fiscal Reforms Transcended Geography and

Political Party

Alberta

Provincial Revenues and Spending(1990-2008)

16%

18%

20%

22%

24%

26%

28%

Per

cent

of G

DP

Spending Revenues

1992:Rev – 22.0%Exp – 25.8%

2008:Rev – 20.9%Exp – 20.2%

Provincial Deficit / Surplus(1993 -2008)

-3.50%

-3.00%

-2.50%

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

Per

cent

of G

DP

Aggregate Provincial Debt(1993-2007)

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

Per

cent

of G

DP

1998:48.4%

2007:40.2%

Provincial Interest Costs(1990-2008)

0%

2%

4%

6%

8%

10%

12%

14%

16%

Per

cent

of R

even

ues

1995:14.9%

2008:8.5%

Total Government Spending as a Percent of GDP (1990-2008)

25

30

35

40

45

50

55

Per

cent

of G

DP

United States Canada

38.5%

53.3%

39.0%

39.7%

Big Time Tax Relief

• Personal Income taxes

• Corporate Income taxes

• Capital Gains Taxes

• Sales Taxes

• Expansion of equivalents to 401(k) and Roth IRAs.

• The debate since 2000 has been about which type of taxes to cut!

Entitlement Programs

• Canada Pension Plan

• Employment Insurance

• Welfare

• Health Care

And the World Didn’t End…

Real GDP Growth

0

1

2

3

4

5

6

Perc

ent

Canada G7 Average - Canada

Real GDP Per Capita Growth

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Perc

ent

Canada G7 Average - Canada

Job Creation

0

0.5

1

1.5

2

2.5

3

Perc

ent

Canada G7 Average - Canada

Gross Fixed Capital Formation

-2

0

2

4

6

8

10

12

14

16

Perc

ent

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Canada G7 Average - Canada

U.S. heading in Canada’s pre-1995 direction

U.S. Federal Surplus/Deficit(As a Percent of GDP)

-14

-12

-10

-8

-6

-4

-2

0

2

4

Per

cent of

GD

P

CBO Update (March 2010)Updated CBO Projections (August 2009)CBO Historical and Baseline Projection (March 2009)

U.S. Federal Debt(As a Percent of GDP)

0102030405060708090

100

Perc

ent of

GD

P

CBO Update (March 2010)Updated CBO Projections (August 2009)CBO Historical and Baseline Projection (March 2009)

90.0%

34.1%

U.S. Federal Interest Payments(As a Percent of Revenues)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Per

cent

CBO Update (March 2010)Updated CBO Projections (August 2009)CBO Historical and Baseline Projection (March 2009)

20.7%

8.5%

U.S. Federal Spending(As a Percent of GDP)

0

5

10

15

20

25

30

Per

cent of

GD

P

CBO Update (March 2010)Updated CBO Projections (August 2009)CBO Historical and Baseline Projection (March 2009)

18.4%

25.2%

Other Challenges to the U.S.

Cost of Entitlements (Social Security, Medicare, and Medicaid)

Tax Challenges:BurdenDesignDistributionCompliance Costs

Centralized Nature of Government

Lessons for the US…• Stay optimisitc - we aren’t doomed

• Every one of the Canadian lessons is entirely applicable to the United States and Europe today.

• America's budget mess can and will be fixed… when the public demands action

• Need to support those that seek to educate the public

Questions & Answers