How to Fix America’s Fiscal Crisis: Reform Lessons from Canada - Chris Edwards, CATO Institute
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Canada faced a fiscal crisis in the early 1990s with large deficits, rising debt levels, and high tax rates. In response, Canada implemented major spending cuts between 1993 and 1997 that reduced federal spending from 23.3% to 15.8% of GDP. This included cuts to areas like defense, government workforce, and business subsidies. Canada also enacted tax cuts for individuals and corporations over this period that lowered rates. As a result of these reforms, Canada balanced its budget every year from 1998 to 2008 and reduced government spending levels compared to other OECD nations.
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How to Fix America’s Fiscal Crisis: Reform Lessons from Canada - Chris Edwards, CATO Institute
- 1. Canada’s Fiscal Reforms: Lessons for the United States Chris Edwards Ch i Ed d Director, Tax Policy Studies, Cato Institute Editor, www DownsizingGovernment org Editor www.DownsizingGovernment.org November 2012
- 2. U.S. Fiscal Crisis Ongoing federal deficits of >$1 trillion. O i f d l d fi it f t illi Federal “debt held by the public” soared from 36% of GDP in 2007 to more than 70% today. today Federal spending of 23% of GDP today is up from 18% in 2001 when the budget was last balanced 2001, balanced. CBO “current policy” projections show federal spending rising to more than 40% of GDP by 2050. 2050 Without spending cuts, there will be rising pressure to raise tax rates. But American businesses already face intense global competition.
- 3. 50% Federal Spending under Current Policies, % GDP Interest 40% 42.8% 42 8% Other Spending Health Care 31.1% 30% 24.1% 20% 18.2% 10% 0% 2000 2010 2030 2050
- 4. Canada’s Fiscal History in Brief Pre-1960s: Relatively small government. 1960s-1980s: Rising government spending. High inflation. N ti li ti i fl ti Nationalization. 1980s: Central bank cuts inflation. U.S.-Canada Free Trade. Trade Modest tax rate cuts Privatization cuts. Privatization. 1990s: Major spending cuts. Federal budget balanced every year, 1998-2008. Privatization. 2000s: Large corporate tax rate cuts. Substantial individual income tax cuts.
- 5. Canada’s Fiscal Crisis of the Early 1990s Deep recession. Federal deficits of >5% of GDP 1979-1994. Federal debt soared to 68% of GDP. Interest costs consumed 1/3 of federal revenues. Wall Street Journal called Canada an “honorary member of the third world” and the Canadian dollar the “northern peso.” High and uncompetitive tax rates.
- 6. Total Government Spending, Percent of GDP Total Government Spending, Percent of GDP 50% OECD Average OECD Average 50% 45% 45% Canada 40% 40% 35% Canada United States 30% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 35% United States 30% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
- 7. Federal Spending as a Share of GDP 30 25 20 United States Canada 15 10 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
- 8. Canada Federal Spending Cuts Federal spending cut from 23.3% in 1993 to 15.8% 23 3% 15 8% today. In two years (1996/1997), federal spending was cut 10%, then held to 2% growth for three more years. What was cut? Defense, government workforce, farm subsidies, unemployment insurance, transportation, business subsidies, foreign aid, grants to provinces. Canada Pension Plan converted from pay as you go pay-as-you-go to partly pre-funded system in 1997. Solvent for the next 75 years. y
- 9. Shares of Total Government Spending United States Canada Federal 38% State/Local 29% Federal 71% Provincial/Local 62%
- 10. Canada Tax Cuts Personal Income Tax Cuts 1980s-2000s: 1980s 2000s: Modest tax rate cuts The top federal/provincial rate is 46%. cuts. 46% 2000: Full indexing of federal income tax brackets. 2000: Federal capital gains rate cut from 19% to 15%. 2008: Tax Free Savings Accounts enacted. enacted Corporate Income Tax Cuts 1987-1988: Federal rate cut 38% to 29%. 2000-2004: Federal t 2000 2004 F d l rate cut 29% to 22%. t t 22% 2007-2012: Federal rate cut to 15%. 2000-2012: Average provincial rate cut 13% to 11%. VAT (“Goods and Services Tax”) Added in 1991. Current rate is 5%. Good news: Repealed a 13.5% Manufacturers Sales Tax. Also, provincial harmonization has reduced the sales tax burden on investment investment. Bad news: Future money machine for government?
- 11. Canada Federal Corporate Tax Rates and Revenues 3.0 40 Tax Rate % (right axis) 35 2.5 30 2.0 25 1.5 20 15 1.0 Tax Revenues % GDP (left axis) 10 0.5 5 0.0 0 1980 1985 1990 1995 2000 2005 2010