(Noun) An Uncontrollable Desire to Spend
Washington politicians just don’t seem very interested in truly curing egregious US spending habits. Sure, the struggle between higher taxes and reduced entitlement expenditures occurs with the regularity of election cycles, but even the most radical suggestions appear to fall flat in addressing what has now become a severe problem. Consider that 62% of all current Federal spending is on entitlement programs, including Medicaid and Medicare, Social Security, and Welfare. Add defense spending and the figure jumps to over 80% of spending. Relative to the overall US economy, these programs now represent 14.3% of total 2012 GDP compared to 9.9% of GDP in 1965.1
The US Solution? Bureaucracy
Spending increases for these combined programs over the past decade have been a major contributor to the accumulated Federal debt of $16.3 trillion, or an estimated $52,000 per person in the US.2 In fact, since 2001 the debt limit has been raised 13-times — a total increase of $10.4 trillion — in order to keeping funding these initiatives.3 This growth in spending is a result of the Keynesian economic philosophy born from the Great Depression, promoting the role of an increasingly activist government during times of economic contractions in order to correct inefficiencies within the private sector.4 The problem with the approach is that the US has neglected to save during those expansionary years; a tenet of Keynesian economics conveniently overlooked by political and monetary leaders alike.
The time for reconsidering the US economic philosophy appears to be at hand. In 2010, Social Security began running a deficit for the first time, paying out $48.9 billion more in entitlement spending relative to receipts,5 and these deficits will deteriorate further after 2015. With 78 million baby boomers retiring and no change to current spending rates, the Heritage foundation estimates that by 2045 the total US federal tax receipts will just cover entitlement spending. Bold changes will need to be taken, but these solutions do not need to be novel or unique. Just ask the Canadians.
The Canadian Solution? Balance
Instead of hamstringing future prosperity through inaction, US policy makers should consider looking to our neighbors in the Great White North for advice. The Canadian approach to dealing with its own spending and debt challenges over the past two decades has been to promote incremental real cuts to superfluous spending programs, as well as implementing reductions to corporate tax rates, which has helped stimulate economic growth.
Fiscal restraint in Canada began in the mid-1990s when Prime Minister Jean Chretien’s Liberal Party ascended to power, cutting expenditures on social and defense programs in order to reduce federal spending levels. This philosophy continued with the change in leadership when current Prime Minister Stephen Harper’s Conservative Party assumed the majority in 2006. Over this entire time period, Federal spending as a percentage of GDP in Canada dropped from 22% in 1995 to under 16% in 2012.6 In comparison, the US is presently running at 24% government spending as a percentage of GDP.
The results of the Canadian experience have been truly impressive. Federal net debt7 in Canada increased by less than 1% per year between 2002 and 2011, and was actually in decline by -1.8% per year up until the global financial recession in 2008.8 Comparatively, US Federal debt increased at an annualized rate of 12.4% over this same time period.9 Similarly, debt-to-GDP in Canada has remained relatively stable from 80.6% in 2003 to roughly 85% in 2012 after falling to 66.5% in 2008,10 while US government debt-to-GDP has nearly doubled from 58.8% in 2003 to 103% in 2012.11 Consequently, it should come as little surprise that Canada also maintains a higher credit rating than the US by both S&P and Moody’s.
Although the widely marketed notion in the US argues that government spending initiatives will encourage economic growth, the Canadian economy has been keeping pace — or even outpacing the US — on virtually all economic criteria despite its more austere approach. Importantly, since January 2007 annual GDP growth rates in Canada have averaged 1.3% measured on a quarterly basis, outpacing 0.9% average annual growth rates in the US, particularly during the 2008 recession.12 Currency markets have clearly taken notice of this improvement in Canadian fundamentals. Since January 2002, the Canadian dollar has appreciated nearly 60% against the US dollar, and has remained above parity for the better part of the last two years.13
Harper’s Conservative party in Canada is clearly not finished with these prudent fiscal measures. Within the 2012 budget, spending reduction proposals included further cuts to various government agencies including agriculture and agri-food, Canada Revenue Agency (similar to IRS in US), public safety, international assistance, and national defense spending.14 Proposals include eliminating the Canadian penny from circulation given that the cost and raw materials of producing a penny is higher than the actual value of the penny;15 an arguably moderate initiative, but one that simply gets chuckles from US legislators.
Interestingly, these initiatives have coincided with lower corporate tax rates. In terms of tax reform, the Conservative Party of Canada implemented a series of corporate tax reductions in 2006 in order to lower the tax rate from what was then 22%. After a number of reductions over the past 6-years, the corporate tax rate has been lowered to 15% as of January 1, 2012. Adding the provincial tax component of 10% to the federal tax rate, Canada’s current total corporate tax rate stands at 25%, sharing the lowest corporate tax among G-7 countries with Great Britain.16 In comparison, the US Federal and State corporate tax rate remains at over 39%.
A US Challenge That Should Not Be Avoided
Some may argue that the wind has been at Canada’s back throughout this reformation, but this should not keep US policy makers from shirking from the challenge. The size of the economy is obviously a key differentiating point between the two as the US economy is over 8-times as large as the Canadian economy in terms of GDP. The US two-party system of government also adds more complications to bipartisan agreements on fiscal matters, which Canada’s parliamentary government appears to more easily navigate. Although Canada supports universal healthcare for its citizens, total spending on large, critical entitlement and defense payments accounts for 40% of the total budget.17 And finally, Canada’s rich natural resource driven economy has clearly benefited from the surge in global demand for commodities over the past decade.
Nevertheless, the Canadian experience shows that a prudent balancing act of revenue and expenditures can have meaningful results over relatively short periods of time. Unfortunately, the US Keynesian experiment has proven to have more fatal flaws than originally theorized, particularly viewing the impact excessive spending can have on reducing economic growth and the debasement of the underlying fiat currency. As US legislators now face the unambiguous problem of growth latency due to excess spending commitments, perhaps it is time for policy makers to consider sage guidance from those who have successfully navigated these waters.
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1. 2012 Federal Budget in Pictures, Heritage Foundation. Online at heritage.org/federalbudget/
2. US National Debt Clock, December 17, 2012.
3. Heritage Foundation
4. “On the Size and Growth of Government”, Garrett and Rhine, Federal Bank of St. Louis Review, January 2006.
5. Social Security Administration, 2011 Trustees Report.
6. “We Can Cut Government: Canada Did”, Cato Policy Report, May/June 2012
7. Defined as the total liabilities of the government less its financial assets
8. Public Accounts of Canada 2011, Prepared by the Receiver General for Canada, Table 1.3, 2012
9. Table D.3 Credit Market Debt Outstanding by Sector, March 8, 2012
10. International Monetary Fund, Trading Economics, October 16, 2012
11. US Bureau of Public Debt, Trading Economics, October 16, 2012
12. Bureau of Economic Analysis, Statistics Canada, Trading Economics, October 16, 2012
13. Bloomberg, October 2012
14. “Budget 2012: Planned Cuts by Department”, National Post, March 29, 2012
15. “Eliminating the Penny”, Economic Action Plan 2012
16. “Canada Cuts Corporate Tax Rate to 15%, Lowest Overall Rate in G-7”, Tax Foundation, Jan 4, 2012
17. “Interactive Graphic: How Ottawa Spends”, Global News, March 26, 2012