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Government outlays: The Canadian Experience — Guest Post by David Ipperciel

In the post “Taxing the Rich Always Fails Eventually,” Briggs states that, “It is rational to believe that these years [of decreasing deficits] will continue to be infrequent.” I believe this to be the case only if one’s world is restricted to the US. However, when looking at the experience from other countries like Sweden or Canada, a different conclusion arises.

The following graph shows the Inflation-adjusted Outlay Per Capita up until 2007 for the Canadian federal government (constant 2007 dollars).

Canadian output per capita

The same situation can be illustrated with the debt to GDP graph, wich peaked around 75% in 1995, and moved below 30% in the following years:

Canadian output per capita

The situation is similar in Sweden, where debt to GDP peaked in 1995 around the same levels, followed by a dramatic turnaround (the graph starts in 1880 and shows the GDP debt ratio):

Sweden GDP per capita

Briggs’s graph starts in 1900, whereas my graph starts in 1961. Prior to 1961, there is no reason to expect a situation much difference from the US: government started with modest goals and modest tax grabs, with peaks during the two World Wars followed by peacetime corrections, in a general uptrend as the state become more omnipresent. The interesting story is what happens after the 1991 recession. While the US outlays continue to push higher, Canadian outlays not only stabilize, but even move lower. What happened?

Outside public outcry and tax hikes to pay for the increasing debt, the first real blow come from Moody’s downgrade of Canada’s foreign debt in 1994, which lost its AAA rating. Then an article from the Wall Street Journal shook Canadians’ perceptions of themselves: the article had called Canada an honorary Third World country because of their out-of-control debt. Something had to be done, and the government reacted swiftly: government spending was cut by 20% and 40,000 public jobs were eliminated.

The political landscape also changed: the conservative Mike Harris was elected in Ontario (the largest province with 38% of the country’s population) in 1995 on his “Common Sense Revolution” platform, which called for large tax and spending cuts, and the elimination of the province’s huge debt. One provincial government after the other voted for balanced budget laws.

In order to implement that initiative, contingent reserves were set up as buffers to make sure spending did not surpass income. Establishing conservative estimates of revenues was seen as sound fiscal planning. Year after year, the surplus came out larger than the government forecast. This situation lasted until the last financial crisis, but there is no reason not to believe that Canada will not regain fiscal balance in the near future.

The Canadian situation shows that governments can change the tide when pushed to the wall. Often, an excuse is needed to enact these changes. The Standard and Poor’s rating agency put the US debt on negative outlook this month, with a potential downgrade in the next two years. Will that bring about the needed changes? Will the unavoidable tax hike push the population to the edge and lead to change? The future is always hard to predict, but one thing is certain: the possibility for change exists, and the experience from Canada (and Sweden and probably other countries we know little about) is there to show it.

6 thoughts on “Government outlays: The Canadian Experience — Guest Post by David Ipperciel Leave a comment

  1. The ability of the citizens of the U.S.A. to self-delude may, like many things, become pre-eminent. So much so that our ability to pursue increased spending [fueled by more debt] while continuing to believe [at least by enough to pull this off] that things will turn out fine, even better, still has a chance to turn the U.S.A. into an also-ran country. Stay tuned….and be patient.

    Meanwhile, here in Virginia, we’ve come to debate the tornado-trailer park relationship:

    Do trailer parks actually induce tornado formation (in addition to their well-known but poorly understood physics for attracting nearby tornados to swing by for a visit)?

    THAT is a statistical question this worthy blog should put to rest using all the creative techniques (p-values, etc.) to settle the idea (that, yes indeed, trailer parks do cause tornados to spontaneously arise).

  2. Ken,
    I live in Virginia too. Today’s weather should provide a definitive answer to the question of trailer parks being a tornado magnet.

  3. All,

    I find the top graph distinctly cheering. Let’s hope that a similar shock stops of reverses the trend here in the States.

  4. Briggs,

    If you are getting a little optimistic, add state and local into the mix. We may stop the bleeding at the neck and continue to loose blood everywhere else.

  5. Canada (a fortiori Sweden) doesn’t have massive and continuing Hispanic immigration and a large welfare dependent/rent-seeking, politically powerful NAM underclass. Nor does it have the vast economy of the US. Nor the huge population. IOW, there are far more rich to soak and far more soakers for whom it will continue to be a more than attractive option. The demographics – determinative in a free democracy – offer a bleak prospect for the generation of the political will to reject the present dispensation in time to preserve the economic viability and political integrity of the state.

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