To achieve such aggressive cuts in federal spending, every program must come under review. There is simply no way around this. Cuts in absolute spending would be necessary across the major CBO budget categories in order to mirror the Canadian approach to total program spending. Likewise, a comparable drawdown in federal employment would mean reducing federal government payrolls by 378,000 over the course of three years.
Lessons from Canada: Getting the Debt Under Control
The Canadian experience shows that a quick move to budget surpluses, coupled with economic growth, can sharply reduce debt as a share of GDP. Fortunately, if the United States matched the Canadian example on spending, then the budget deficit would disappear in less than a decade, under both scenarios of revenue growth put out by the CBO.
If revenue grew according to the CBO baseline forecast, and if total US government spending followed the Canadian example, then over the first 10 years of reform, the debt/GDP ratio would fall from about three-quarters in FY 2012 to just a third by FY 2022.
Lessons from Canada: Entitlement Reform
Absent major demographic changes, there is no way to continue with present tax and benefit schedules earmarked for these dedicated programs. Although the entitlement situation in the United States presents unique difficulties, the Canadian approach to social insurance at the federal level provides some instructive lessons.
First and most obvious, the Canadians significantly increased the tax rate on earnings earmarked for the Canadian Pension Plan. In addition to the tax-rate increase, changes to benefit schedules were also introduced, including reduced eligibility for disability benefits, a cap on death benefits, and a change in the formula for individual benefit payments.
Yet there are other lessons to be drawn from Canada’s approach to entitlements. Despite the tax-rate increase, the CPP tax is much less onerous than the Social Security tax on US workers and employers, in terms of both percentage and the amount of income taxable.
In Canada, the federal pension plan does not assume nearly the same role in retirement planning as Social Security has come to mean in the United States. For starters, the benefit can only be one-quarter of pensionable earnings. To handle cases of seniors deemed to have an inadequate income, there is a dedicated, means-tested program, namely the Guaranteed Income Supplement (GIS) program, financed out of general tax revenues. Finally, Canada has a federal Old Age Security (OAS) program, which is also paid out of general revenues and is not tied to a recipient’s work history.
The interesting feature of the Canadian approach is that it breaks up the functions handled in the United States by Social Security (and to some extent, Medicare and Medicaid) into separate programs. US policymakers should consider something similar as part of longer-term reform.
Lessons from Canada: Decentralization
The final lesson from Canada is its move to a smaller role for the federal government. Starting in the early 1970s the two countries spent similar shares of GDP on their respective federal governments. Yet from 1996 onward, a widening gap developed. Clearly, if the United States is to mirror the Canadian approach to fiscal reform, the federal government needs to drastically reduce its role in the economy.
Lessons from Canada: Managing the politics of reform
Perhaps the most important lesson of all from Canada isn’t what they did, but rather how they did it. We can distill six political lessons from Canada’s reform program of the 1990s.
1.Focus on reform is required across party lines. Progress on the deficit only became possible when Canadian parties ceased to treat it as a matter of partisan contention, but rather of vital national interest.
2.Politicians can’t play favorites with reform, carving out exemptions for their friends and socking it to their opponents. If fixing the deficit is a challenge for the nation, then the whole nation has to be called upon to contribute.
3.Time is of the essence. Proceeding piecemeal instead of broadly and decisively undermines the wide social consensus necessary, and would have delayed the handsome pay-off that Canadians enjoyed once they had broken the back of the deficit.
4.Reforms must be carried out intelligently and humanely. Canadians accepted that the policy was fair, and that mattered a great deal to them.
5.A simple, easy to understand target is crucial to maintaining public support. When Canada set a goal to eliminate the deficit, the nation eagerly awaited each budget and took great pride in reaching that goal.
6.If you get all the other elements right, the supposedly insurmountable institutional obstacles to reform often prove to be paper tigers.
What American politicians most need to know from the Canadian experience is that thoughtful reform, cleverly managed, paid handsome political dividends: The Liberal government of Prime Minister Jean Chrétien that introduced these changes was handily re-elected in 1997 and 2000, and reforming provincial governments in places like Alberta and Saskatchewan enjoyed similar success.
Conclusion
The United States achieved a budget surplus as recently as the Clinton years. Back then, thanks to tax receipts buoyed by a strong economy, eliminating the deficit only required slowing spending growth. However, the current US situation is worse, and the fiscal hole is deeper. Genuine reductions in federal government spending and employment are necessary. As politically difficult as these reforms may be, they are not impossible. Canadians did it in the mid-1990s, and so can Americans today. The payoff was a quick turnaround in the government’s fiscal position without hampering economic growth, and lower taxes in the longer-run that buoyed future growth.
introduction
St. Augustine of Hippo knew something about both virtue and pleasure. On the one hand he knew that there would be rewards in heaven for men and women who lived the upright life. On the other hand, when he was younger, heaven seemed a very distant prospect and the pleasures of bad behavior seemed vivid and immediate. Thus his famous prayer: “Oh Lord, make me chaste and celibate – but not yet!”
St Augustine could well be the perfect candidate for patron saint of Washington D.C., where debt-obsessed Tea Party protestors wave placards saying “Hands off my Social Security.”
Both voters and politicians profess alarm about the looming fiscal crisis facing the United States, but they always manage to defer serious reforms because the problem never seems like an emergency just yet, and the pleasures of deficit spending just seem so inviting when compared to the hair shirt of fiscal reform. Certain politicians – especially if their party doesn’t occupy the White House – sound the alarm, commissions warn about the impending demographic realities, and everyone pays lip service to correcting the fiscal course of the ship of state. But nothing substantive ever seems to change.
The situation is now entirely different. The severe recession reduced tax receipts and accelerated retirement for many Americans, causing the Social Security program to take in less than it paid out years ahead of schedule. Government debt crises in Europe are leading commentators to speculate about the fate of the euro itself, something that would have been unthinkable to many just a few years ago. Europe’s situation has led Americans to reevaluate the strength of their own government’s finances, and wonder if the “unthinkable” could happen here as well, with little warning.
Yet there is hope, and it is the purpose of this book to show why. But first it will require an acknowledgement of the problem, and also a newfound humility. Americans view their nation as the leader of the free world and see their Founding Fathers as peerless giants who designed the ultimate