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Canada (1995) = United States (2010)?


omagh
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If macro is your thing, you may find this interesting.  Tax geeks will find some interesting bits too.

 

-O

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2010/10/18/o-canada.aspx

[snip]

As I’ve given various speeches over the last year, it has become clear to me that very few Americans are aware of the extraordinary recovery Canada has achieved since the mid-1990s. When I bring it up, most people seem surprised that Canada could have gone from a laughing stock to the envy of the developed world in just a decade. But, actually, 10 years wasn’t the true recovery period. And that was my big surprise from reading The Canadian Century. The reality is that Canada achieved stunning progress in a mere three years. Further, this time frame was consistent at both the federal and provincial levels. In case you think I’m exaggerating the speed and magnitude of the rehabilitation, let me provide some specificity:

 

• Paul Martin, the finance minister for the national Liberal Party, unveiled a budget in early 1995 that shocked all the cynics accustomed to smoke-and-mirrors accounting. It reduced program spending by 8.8% over two years (and our politicos quiver over a mere hint of spending freezes).

 

• As part of this radical spending rationalization, federal government employment was reduced by 14%.

 

• Federal grants to the provinces were reduced by 14% as well, but the trade-off was that they were allowed to control how the money was spent. Provincial governments also needed to provide half of all funding (i.e., put skin in the game).

 

• While some taxes were raised (and, according to the authors, these worked against the recovery), spending cuts were 4 ½ times tax hikes.

 

• Canada’s welfare system was dramatically modified. Rather than just providing a blank check to the provinces (which administered the welfare programs), Ottawa incentivized them to put the funds to better use. Benefits were cut for single, employable individuals and aggressive efforts were made to get them back in the work force.

 

• Despite accusations from the far left that the poor would suffer due to these changes, the percentage of welfare recipients fell in just a few short years from 10.7% of the population to 6.8% by 2000. From 1997 to 2007, the percentage of Canadians classified as low-income plunged by over 30%.

 

• The tax structure was dramatically redesigned. Corporate tax rates were cut by nearly a third, taxes on corporate capital were abolished, and personal income and capital gains taxes were reduced.

 

• The General Services Tax (basically a consumption tax or VAT) was instituted to pay for the tax cuts described above. While initially very unpopular, it was a key part of the rehab plan.

 

• The Canada Pension Plan (CPP), the country’s version of Social Security, also underwent major surgery. Instead of payroll taxes gradually rising to 14%, the increases were pulled forward but capped at under 10%. This produced immediate surpluses that were invested in higher-returning corporate securities. (As noted in past EVAs, this is a huge defect with our Social Security system; its many trillions are tied up in low-yielding US government bonds that simply add to our overall national indebtedness.) The CPP today is well-funded and actuarially sound.

 

• As a result of these actions, and many others I’ve left out, the federal budget was balanced within three years.

 

After achieving this remarkable feat, Canada went on to produce 11 straight budget surpluses. This allowed our northern neighbors to reduce their federal debt from 80% of GDP to 45%. Further demonstrating how quickly good policy can turn things around, the provinces enacted similar measures. Most of them also moved to balanced budgets or surpluses within just three years, though in the case of Ontario it took five years. However, that was still one year ahead of schedule (pronounced “shh-edule”, of course). By contrast, even Congressman Paul Ryan’s allegedly bold goal to balance the US budget will take decades to attain.

[snip]

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Nope, energy prices were not really a tail-wind in the 1990s....the big improvements in crude prices occurred in the 2000s.

 

There were, however, a number of circumstances in Canada that might not be available in the US or other countries:

 

1) We were coming out of the recession of 1992/93.  This was important because employment insurance indemnities decreased and income tax receipts increased as people returned to the work-force.

 

2) Interest rates were coming down.  This allowed governments to refinance the existing debt at lower interest rates as the bonds came to maturity.  This was of enormous help.

 

3) The federal government chopped transfer payments to the provincial governments which was also a big help (but not for the provinces!).

 

 

For the US and most European economies, my sense is that #1 is still a couple of years away, #2 is virtually impossible since interest rates are already near zero, and #3 is only available in federations where fiscal transfers are large.  In the absence of #1-3, there may need to be a more aggressive reduction in program spending or in the size of the core public service.

 

SJ

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Guest broxburnboy

Nope, energy prices were not really a tail-wind in the 1990s....the big improvements in crude prices occurred in the 2000s.

 

There were, however, a number of circumstances in Canada that might not be available in the US or other countries:

 

1) We were coming out of the recession of 1992/93.  This was important because employment insurance indemnities decreased and income tax receipts increased as people returned to the work-force.

 

2) Interest rates were coming down.  This allowed governments to refinance the existing debt at lower interest rates as the bonds came to maturity.  This was of enormous help.

 

3) The federal government chopped transfer payments to the provincial governments which was also a big help (but not for the provinces!).

 

 

For the US and most European economies, my sense is that #1 is still a couple of years away, #2 is virtually impossible since interest rates are already near zero, and #3 is only available in federations where fiscal transfers are large.  In the absence of #1-3, there may need to be a more aggressive reduction in program spending or in the size of the core public service.

 

SJ

 

The US has several headwinds that Canada did not:

 

Canada had an ongoing positive balance of trade (as does Japan.. that's where the USA/Japan deflation scenario differs)

Canada pursued a weak CDN dollar policy to benefit export and job growth... try as it might, the other countries competitively devalue their own currencies, so this out is not available to the US (so far)

The US military budget is way out whack  with its stimulus effects

Canada is a commodity based economy.. USA has a consumer/manufacturing base...the jobs may be permanently gone.

 

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Several countries have taken the same or similar medicine with success - New Zealand, etc.  The US got into this situation by overspending and under-taxing.  The way out is to underspend and increase taxes.  To appreciate the situation in Canada you had to be there.  It was bad.  There was a period in 1992/1993/1994 when nobody I knew in my age group was working - I mean no one.  There was no commodity support as alluded to above.  There was the support of the export economy and the IT industry in Ottawa soaked up some gov't job losses.  

 

I dont believe that the US can do what Canada had to do because of its political structure.  In Canada we had a majority government elected late in 1993 which had 5 unimpeded years to do what needed to be done.  In the US you have the issues of the two party system and the continuous electioneering that our politicians simply dont have.  

 

There is the additional effect that the US would have on the rest of the world by overspending and raising taxes simultaneously.  They would likely cause a rapid and deep worldwide recession and no one would be insulated including Canada.  With the likely exceptions of border states Canada's cuts had little overflow effects on the world at large.      

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