If Americans find the will to face reality before markets force them into action, they can get their fiscal house in order. But they will live through a more painful and longer period of spending restraint than their northern cousins did when Canada tackled government overspending in the ’90s, says a new report issued on May 25 by David Rosenberg, chief economist at wealth management firm Gluskin Sheff.
Noting the Brits hired Canadian deficit slayer Paul Martin as a public finance consultant, Rosenberg argues the world’s largest economy would also benefit from seriously studying Ottawa’s path from fiscal basket case to balanced budgets.
In the early ‘90s, Canada had a deficit-to-GDP ratio of 5.6%. By 1998, the nation was running a slight surplus. Canada’s federal debt-to-GDP ratio approached 70% in the mid-‘90s, which is where the U.S. sits today. Canada now has a debt-to-GDP ratio of 34%, which is why we are still the envy of the OECD crowd, despite dipping back into deficit spending to fight the downturn.
To swing from massive deficits to surpluses, Canadian program spending as a share of GDP contracted to 12.1% from 17.4%. “That,” Rosenberg says, “came out to a near-$50 billion haircut. But the revenue-yield—what the government takes in relative to GDP—also rose from 17% to 18.2% for another $10 billion squeeze on the population.”
A similar move in the U.S. today would imply US$1 trillion of tax and spending shifts, almost a 1% drain on GDP growth for at least the next half decade, if not longer. “That is a lot of pain, to be sure, but not insurmountable given the rewards down the road of reclaiming one’s fiscal flexibility.”
Whatever happens, Rosenberg adds, if the U.S. faces reality, sacred cows such as mortgage interest deductibility will be slaughtered.