Canada's Fiscal Reforms

Two decades ago Canada suffered a deep recession and teetered on the brink of a debt crisis caused by rising government spending. The Wall Street Journal said that growing debt was making Canada an honorary member of the third world with the northern peso as its currency. However, Canada reversed course and cut government spending, balanced its budget, and enacted pro-market reforms. It reduced trade barriers, privatized businesses, and slashed its corporate tax rate. The economy boomed, unemployment plunged, and the formerly weak Canadian dollar soared to reach parity with the U.S. dollar. The Canadian reforms were hugely successful. Today, the United States is in as bad or worse fiscal shape than Canada was in. U.S. leaders need to make major fiscal and economic reforms, and they can learn many lessons from Canadian efforts to restrain government and create a more competitive economy. From Markets to Socialism and Back Canada has a long history of stable government and general prosperity. Like the United States, it enjoyed a relatively limited government before the mid-20th century. Early Canadian leaders leaned toward classical liberal beliefs, and they tried to keep taxes at least as low as U.S. taxes in order to attract immigrants and investment. In The Canadian Century, Brian Lee Crowley, Jason Clemens, and Niels Veldhuis (2010) discuss how Wilfred Laurier--prime minister from 1896 to 1911--was a strong supporter of spending restraint, low taxes, free trade, and civil liberties. Laurier was one of the country's greatest leaders, and he envisioned Canada as a decentralized federation that supported individual liberty. That sounds like the vision of America's Founders. That vision, of course, faced major setbacks in both countries in the 20th century. In some cases Canada resisted the rising tide of big government longer than the United States. The United States was the first to establish a central bank, an income tax, a capital gains tax, and a number of social welfare programs. Until the 1960s, government spending relative to the size of the economy was about the same in the two countries. Unfortunately, Canada veered sharply left in the late 1960s, beginning a 16-year spending binge and expansion of the welfare state. The Canadian leader during most of that time was Pierre Trudeau, who was a brilliant man but favored left-wing economic policies. He expanded programs, raised taxes, nationalized businesses, and imposed barriers to international investment. Canada also suffered from high inflation during the 1970s and early 1980s. Trudeau's socialist grip on public policy began to weaken in the 1980s. The policies of Ronald Reagan mad Margaret Thatcher were ascendant, and globalization was putting pressure on Canada to make reforms. In the mid-1980s, the Canadian central bank adopted a goal of price stability, which greatly reduced inflation and has kept it low and stable ever since. And following U.S. tax reforms in 1986, Canada enacted its own income tax cuts under Progressive Conservative Prime Minister Brian Mulroney. Thatcher's privatization revolution also inspired reforms in Canada. The government privatized Air Canada in 1988, Petro-Canada in 1991, and Canadian National Railways in 1995. All in all, Canada privatized about two dozen crown corporations in the late 1980s and early 1990s. In 1996 it even privatized the air traffic control system, which provides a good model for possible U.S. reforms. Privatization reduced government debt and helped spur economic growth by creating a more dynamic industrial structure. The other major reform of the late 1980s was the free trade agreement with the United States. The debate over the 1988 agreement was a titanic political struggle in Canada. But in the years following passage, the success of the agreement has been a powerful force in reorienting Canada toward market-based policies. Spending Reforms of the 1990s Canada was starting to move in the right direction, but rising government spending and debt were undermining growth and creating financial instability. …

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