Canada Cuts the Cheese


“When you need to cut down on government consumption there are two different approaches. One way is to take a little bit from everything . . . to use the cheese slicer . . . to take equally from everyone. The other way to decrease spending is to use the cake-slicer, ie to surgically remove selected items.”

 

Canada has managed to weather the global financial storm virtually unscathed. How did our neighbors to the north, with whom we share so much, manage the situation so much better than we in the States?

They did it by responding to their own budget crisis of the early 90’s like adults – getting their fiscal house in order and maintaining fairly stringent financial regulations.  That and a bit of public embarrassment as well, but more on that later.

These efforts, previously unremarked upon, are getting a lot of attention now as countries debate the merits of budget cuts versus Keynesian style stimulative deficit spending.

From the UK BBC

As Prime Minister David Cameron warns of the need for extensive spending cuts to bring down the UK’s substantial public deficit, the Conservative-Liberal Democrat coalition is aiming to follow the achievement of the Canadian government between 1993 and 1996 

During those four years, the then Canadian administration of prime minister Jean Chretien managed to turn a deficit of 9.1% or 39bn Canadian dollars ($37bn; £25bn) into a small budget surplus.

How they did it without raising taxes below the fold.

Canada, crippled under the weight of interest payments on its debt, went from a budget deficit 8% of GDP (The U.S. is currently at 11.5% of GDP) to a surplus 1.8% of GDP without raising taxes.  They did it by making honest, hard, and substantial budget cuts.  Further, these cuts did not lead to rising unemployment – contrary to the Keynesian prediction. 

Cuts as substantial as these are not easy for politicians to approve.  People that receive the benefits of government largesse rarely acquiesce quietly and politely.  But with Moody’s issuing a debt rating warning, the Wall Street Journal calling Canada “a third world banana republic” and others calling Canada an “honorary member of the third world” Canadians were embarrassed into responding. Again from the BBC

Given most Canadians’ dislike of all things American (think sibling rivalry), this insult by a US newspaper was enough to make them realise they had to get their national finances in order, whatever the misery along the way.

I was reminded of Canada’s response to outside ridicule after reading Hu Jintao’s comments yesterday about the U.S. fiscal picture.  But if only we were so prone to embarrassment.

Today’s But If Not is that it is possible to get out from under the weight of our current struggles without crushing tax increases. 

Take a look at this graph of Canadian budget deficits/surpluses over the past 40 years and keep it close to your heart.  Given the depth of cuts necessary we are going to need the inspiration of this picture for strength.

For more on how Canada did it I strongly recommend this working paper from David Henderson.


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