Compared to Canada, It’s a Fiscal Dip, Not Cliff
Brian Lee Crowley: Compared to Canada, It’s a Fiscal Dip, Not Cliff
As the prospect for a last-minute deal seems ever bleaker, the politicians and pundits are warning Americans to brace themselves for a plunge off the so-called fiscal cliff to disaster. Yet even if the much dreaded spending cuts and tax hikes go through as scheduled, they will be a drop in the bucket compared to the amazing fiscal reform that Canada achieved in the 1990s. Americans might like to know that Canada proves you can balance the budget without wrecking your economy.
First the background: By the mid-1990s the Canadian federal government had been running deficits for two decades, with a third of federal revenue being absorbed by interest payments. The international economic situation was dire. Fresh on the heels of the Mexican peso crisis, a Wall Street Journal editorial from January 12, 1995 viewed Canada as similarly vulnerable and declared that the U.S.’s neighbor to the north “…has now become an honorary member of the Third World in the unmanageability of its debt problem…it has lost its triple-A credit rating and can’t assume that lenders will be willing to refinance its growing debt.”
The Canadians retreated from the abyss when the center-left Liberal government tabled their historic budget in February, 1995. Total federal government spending fell by more than 7 percent over two years, while the budget deficit of $32 billion (4 percent of GDP) was transformed into a $2.5 billion surplus. By January 1998, federal employment was down by 14 percent or 51,000 people. Ottawa ran 11 consecutive budget surpluses beginning in the 1997/98 budget year, causing the total public debt to plummet as a share of GDP. They tightened welfare and fixed their version of social security.
Far from wrecking the economy, in the decade after reform Canada out-performed all the other G7 nations on economic growth, investment, and job creation. In the recent worldwide recession Canada’s economic robustness allowed it to weather the downturn better than any other G7 nation. Even in the short-term, the dramatic fiscal austerity in the 1990s was mild in its side effects, merely causing a temporary uptick in the unemployment rate that was quickly reversed.
It is instructive to compare Canada’s experience with what is known as America’s fiscal cliff, as projected by the Congressional Budget Office (CBO) in its August update. It is far more modest than what Canada achieved.