Reports last week that the recession is draining SocialSecurity and Medicare funds were just one morereminder that the United States needs to fix its finances. Forinspiration, why not look to Canada? Long derided by Americanconservatives as "socialist" and praised by the left for itsgenerous government spending, Canada is casting off thosestereotypes. Over the past few years, while U.S. politicianspresided over huge increases in spending and debt, theCanadian government tightened its belt, slashed tax rates andbalanced budgets. Consider these trends:
Spending: Spending byall levels of the Canadiangovernment peaked at 53percent of the country'sGDP in the early 1990s,then plunged to 40percent in 2008. U.S.government spending hasrisen, reaching 39 percentof GDP in 2008. And withthe stimulus package, thatnumber is likely to jumpeven higher.
Debt: The Canadiangovernment cut its debtfrom 71 percent of GDPin 1995 to 32 percent in2008. Under PresidentObama's budget plan,U.S. federal public debtwill jump from 41 percentof GDP in 2008 to morethan 60 percent next year.
Deficits: Canada has balanced its budget every year since 1998 — not by raising taxes, but by cutting spending. The United States balanced its budget for four years in the late 1990s, but now deficits are so large that it's difficult to imagine that ever happening again.
Social Security: While Canada and the United States spend the same percentage of their GDP on retirement benefits, the U.S. program has a large unfunded liability that policymakers have done little to fix. Canada began putting aside money in the 1990s to pre-fund future benefits, just as private pension plans do. The Canada Pension Plan is now fully solvent.
Federalism: While the U.S. government grew more centralized in recent decades, Canada's federal government ceded power. President Bush's education policies increased federal control over American schools; in Canada, K-12 education isleft to the provinces.
Corporate Taxes:Canada has cut thecorporate tax rate from 28percent to just 15 percent,and most provinces havetrimmed corporate taxesas well. The U.S. federalstaterate stands at about40 percent, and theObama administration isplanning to increasecorporate taxes.
Individual Taxes:Canada has had higherindividual income taxesthan the United States,particularly in the topbrackets. However, ifcurrent tax cuts expire atthe end of 2010 asscheduled, the top U.S.federal-state rate willaverage 46 percent — thesame as in Canada. Also,Canada's federal capitalgains tax rate is lowerthan the one U.S.investors pay.
Too often in the United States, Democrats reject cuts in taxes and spending because they consider them Republican causes. Yet inCanada, center-left governments implemented many of the reforms that made these impressive numbers possible. Perhaps we have something to learn from those "socialists" to the north.
SOURCES: Organization for Economic Cooperation and Development; Statistics Canada; Bureau ofEconomic Analysis; National Income and Product Accounts; Public Accounts of Canada; Social SecurityTrustees Annual Report, 2009; U.S. OMB/CBO; authors' calculations