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An essay published in the fall 2011 issue of Hoover Digest by David R. Henderson, research fellow at the Hoover Institution, goes into detail about how Canada substantially reduced its federal debt by – are you ready for this – cutting spending. There are many lessons from Henderson’s analysis and this economic success story that should wake up and spark the United States’ political leadership.
In 1993, Canada’s ratio of federal debt to gross domestic product was close to 70 percent, and the country was drowning in high annual deficits. By the late 1990s, this debt-to-output ratio had fallen to 50 percent. By 2009, the federal debt ratio stood at 29 percent of GDP.
With Canada’s preference for socialized medicine and high tax rates, one might expect that these results came from increasing taxes. However, it was just the opposite: approximately 85 cents of every dollar of the annual deficit reduction came from spending cuts. What’s more, this happened during slow economic times, a major blow to the Keynesian philosophy currently being espoused in the United States that you cannot cut government spending in periods of slow growth. In addition, as money left the public sector and poured into the private sector, Canada experienced an increase in real growth between 4 and 5 percent from 1997 to 2000.
The U.S. is in dire need of determined and committed leadership. In the United States, when politicians argue about cutting government spending, they squabble about cutting the rate of projected increases and then label that a “cut.” In Canada, politicians “cut” out the nonsense and reduced absolute, real spending on numerous programs. While Canada had its internal critics, government leaders pushed through to restore its country’s fiscal order.
The U.S. lacks the determined leadership in Washington, D.C., to take this decisive action and correct the U.S. economy.
Take for example the recent Standard & Poor’s debacle in the United States. Back in the early ’90s, S&P and Moody’s Investor Service imposed lowered ratings on Canada. Rather than playing political games and attacking each rating firm – like critics of the S&P recently did in the U.S. – these poor evaluations in Canada alarmed its government and convinced it to take four prudent steps to overhaul the country.