So, what can the United States learn from Canada?
When it comes to fixing its budget mess, it turns out, not much.
A seminar here, jointly sponsored by the Washington-based Tax Policy Center and Montreal’s Institute for Research on Public Policy, heard all about Canada’s “fiscal miracle.” We went from G7 zero to hero in averting a Greece-like descent in the 1990s.
But the panelists all agreed that the conditions that allowed then-Liberal finance minister Paul Martin (former prime minister Jean Chrétien’s name did not come up once) to impose the tightest fiscal policy in the developed world are sadly unavailable to American politicians today.
In his 1995 budget, Mr. Martin slashed transfers to the provinces by one-third, began cutting 50,000 jobs from the public service, and chopped program spending by 10 per cent. The cuts put Canada on a virtuous fiscal course that eventually enabled it to cut the federal debt-to-gross domestic product ratio to 40 per cent by 2005 from 68 per cent.
However, as IRPP senior scholar and Queen’s University economist Tom Courchene noted, Mr. Martin had “the wind at his back.” Americans, in contrast, are currently facing enormous head winds that make imitating Canada near impossible.
Indeed, Canada embraced fiscal rectitude during a worldwide economic boom and declining oil prices. The latter drove the value of the Canadian dollar to historic lows against the U.S. greenback, fuelling an export surge that offset the pain of government cuts.
Canada also faced a true fiscal crisis as financial markets began to lose confidence in its debt. That made it easier to sell the public on the need for tough budget cuts. Indeed, public opinion largely got behind the Liberal government’s plan.
The U.S. faces no similar debt crisis. The global appetite for Treasury bonds remains insatiable, allowing the U.S. to borrow at will and alleviating pressure on Congress to act decisively to rein in the $1.3-trillion deficit.
Besides, the United States has yet to recover from the recession, making hefty domestic spending cuts potentially damaging to the country’s economic health.
Canada put the Canada Pension Plan on a sustainable track a decade before the baby boom generation began to retire. Social Security in the U.S. remains a pay-as-you-go system where current contributions are used to pay out current benefits. With the baby boomers now leaving the work force, the strain on the U.S. budget deficit will only grow.
Council on Foreign Relations senior fellow Edward Alden added that Canada’s two main political parties at the time, the Progressive Conservatives and the Liberals, each had a “Nixon-to-China” moment in defying its traditional base.
Brian Mulroney adopted the goods and services tax (GST), which became a cash cow that later helped Mr. Martin and made Canadian manufactured exports more competitive. (It also helped fuel the birth of the Reform Party.)
Mr. Martin took on the progressive wing of the Liberal Party in successfully arguing for drastic fiscal medicine. The rise of Reform allowed him to look like a moderate by comparison.
In those days, “everyone was trying to occupy the centre – not Wall Street,” Prof. Courchene quipped.
Urban Institute fellow Rudolph Penner shot back: “Tom said the major parties moved to the centre. The major problem we have [in the U.S.]is that there is no centre…The importance of the polarization here cannot be overemphasized.”
An all-powerful executive branch and party discipline in Canada’s parliamentary system also made imposing fiscal discipline much easier. In the U.S. system, power is diffuse. A President’s budget is typically more of a wish list than iron-clad fiscal proposal.
In the U.S, “you have 535 political entrepreneurs” in Congress, noted Chris Edwards, director of tax policy at the libertarian Cato Institute.
Still, Prof. Courchene suggested that if the United States followed Canada in only one regard, it should be to embrace a value-added tax similar to the GST. Not only would it simplify a labyrinthine tax system, it would enable the U.S. to cut its corporate tax rate – among the developed world’s highest – and improve its export competitiveness.
In the end, however, he said there is likely no way out of the U.S. fiscal pickle that does not involve higher overall taxes for Americans.
“The problem the U.S. has,” Prof. Courchene offered, “is that they’re really trying to run European spending on American tax rates.”