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How Canucks Avoided the Fiscal Cliff

Posted: 12/28/2012 5:13 pm

Only a decade ago former Presidential candidate, Pat Buchanan, ignorantly called Canada "Soviet Canuckistan." The comment played into the false stereotype of Canada as a command-and-control welfare state. We Canadians knew it was wrong then. Americans across the political spectrum know it is wrong now.

U.S. commentators no longer ridicule Canada. In fact, many are looking to us for answers to their own economic crises. I discovered this after I gave a speech in Parliament, which contrasted the success of free enterprise in Canada, with the failure of the welfare state in America and Europe. I assumed my mother and I would be its only YouTube viewers, as usual.

It was with shock that I watched it go viral in the U.S., with almost 100,000 views there at www.pierremp.ca/budget.

Comments on the YouTube page show Americans are looking north for answers as Washington finishes 2012 in a debt crisis. In a few days the "fiscal cliff" deadline will arrive and potentially bring massive automatic spending cuts and tax increases. Even if Congress and the President agree to avoid the cliff, the next crisis awaits. Treasury Secretary, Timothy Geithner, wrote the Senate this week to report that the "statutory debt limit will be reached on December 31, 2012," which will require extraordinary measures to prevent a mass default. These measures will give the government 60 days before it runs out of money and Uncle Sam's head smashes into the so-called "debt ceiling."


It has long been said that when the U.S. sneezes, Canada catches a cold. So why have these debt-related ailments in the U.S. not afflicted the Canadian government?

The answer is that Canada has been practicing what the U.S. always preached: free markets, low taxes and minimal state interference. And it is working.

For example, Canada avoided the interventionist policies that led the U.S. to the sub-prime crisis.

In an attempt to expand home ownership, administrations from Carter to Bush Jr. forced banks to offer mortgages to people who would otherwise not qualify for them. Washington then ordered government-sponsored enterprises such as Freddie Mac and Fannie Mae to insure these "sub-prime" mortgages.

According to a 2010 Report on the U.S. Financial Crisis by the World Bank's Development Research Group, Freddie and Fannie bought an estimated 47 per cent of these toxic mortgages. Harvard financial historian Niall Ferguson indicates that the amount of mortgage debt backed by these government-sponsored enterprises grew from $200-million in 1980 to $4-trillion in 2007.(1) The government pumped so much air into the housing bubble that it burst in 2008. The resulting financial crisis led to government bailouts of the banking sector.

Big government caused the economic crisis. So we are told the solution is more big government. Funny how the problem becomes the solution.

Because the Canadian government did not impose sub-prime mortgages on the country's charter banks, we avoided the crisis and did not bailout a single financial institution. To keep it that way, Canada's Finance Minister has ended all government-backed insurance of low-down payment and long-amortization mortgages. In other words, if you want to take on risky debt, taxpayers will not insure you.

Governments must lead by example when managing their own debt and spending. Low debt is the result of low spending. Federal government spending as a share of the overall economy is 15 per cent in Canada (2) and 24 per cent in the U.S. (3). The numbers are not merely the result of prodigious U.S. military spending, though that is certainly a factor. Non-military federal government spending is 14 per cent of Canada's economy (4), and 18 per cent of America's (5).

Just as cause equals effect, spending equals debt. Net government debt as a share of the Canadian economy is 36 per cent. In the U.S., it is 83 per cent. America's gross government debt is now bigger than the entire U.S. economy. According to the U.S. Treasury Department website, Mainland China holds $1.1 trillion of it. To quote Mark Steyn: "If the People's Republic carries on buying American debt at the rate it has in recent times, then within a few years U.S. interest payments on that debt will be covering the entire cost of the Chinese armed forces."

Imagine: through debt interest, soon American taxpayers will be funding 100 per cent of the Chinese military.

Steyn points out that, according to the Congressional Budget Office, by 2020 the United States government will be spending more annually on debt interest than the total combined military budgets of China, Britain, France, Russia, Japan, Germany, Saudi Arabia, India, Italy, South Korea, Brazil, Canada, Australia, Spain, Turkey, and Israel.

Meanwhile, job creators enjoy a growing tax advantage north of the border. Total corporate tax rates of all levels of government average 26.1 per cent in Canada, versus 39.1 per cent in the U.S.

These policy decisions have led the Wall Street Journal and Heritage Foundation to rank Canada sixth in the world on the economic freedom index. The U.S. now ranks 10th.

That is why we Canucks are not jumping off cliffs or smashing into ceilings.

To keep it that way, governments at all levels must quickly balance their budgets, while keeping taxes low. We need only look south to see the alternative.

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  • Military Health Care - $16 Billion

    In his last offer to House Speaker John Boehner (R-Ohio), President Barack Obama lobbied for $16 billion in cuts from the military's health care program, TRICARE. In 2012, the president also proposed hiking fees for military personnel and veterans who receive benefits under the program in an effort to help cut the defense budget. His proposal drew significant fire from Republican lawmakers and veterans' groups.

  • Military Retirement Program - $11 Billion

    Both sides agreed to cuts from the military retirement program. Rep. Eric Cantor (R-Va.) claimed during July 2011 talks that lawmakers had reached a tentative deal to slash <a href="http://www.huffingtonpost.com/2012/11/11/fiscal-cliff-talks-medicare-social-security_n_2113259.html" target="_hplink">$11 billion</a>. Under the current system, military personnel receive immediate retirement benefits after serving for 20 years. According to a recent report from the Congressional Budget Office, the appropriation cost per active military service member has <a href="http://www.cbo.gov/publication/43574" target="_hplink">increased at a higher rate</a> than either inflation or the total pay package of private-sector employees. Given the budget constraints looming before the Defense Department, the CBO floated the idea of transitioning the military retirement program to a matching-payment model.

  • Federal Employee Retirement Program - $33 -$36 Billion

    Cantor claimed that Republicans and Democrats had agreed to <a href="http://www.huffingtonpost.com/2012/11/11/fiscal-cliff-talks-medicare-social-security_n_2113259.html" target="_hplink">$36 billion in savings</a> over 10 years from civilian retirement programs. The president proposed a marginally more modest figure of <a href="http://presspass.nbcnews.com/_news/2012/11/11/15089281-white-house-grand-bargain-offer-to-speaker-boehner-obtained-by-bob-woodward#.UKCJftkTtS8.twitter" target="_hplink">$33 billion</a> in his final offer to House Speaker John Boehner. Just this year, Republicans in the House Committee on Oversight and Government Reform also looked to find savings from the Federal Employee Retirement System by <a href="http://www.washingtonpost.com/blogs/federal-eye/post/house-committee-approves-measure-upping-federal-employee-contributions-to-retirement-plan/2012/04/26/gIQAuoW6iT_blog.html" target="_hplink">requiring employees to pay more of their salary</a> into their pensions, which Democrats opposed as a pay cut that would make civil service less attractive for top talent. In September 2011, the federal government employed <a href="http://www.fedscope.opm.gov/cognos/cgi-bin/ppdscgi.exe?DC=Q&E=/FSe%20-%20Status/Employment%20-%20September%202012&LA=en&LO=en-us&BACK=/cognos/cgi-bin/ppdscgi.exe?toc=%2FFSe%20-%20Status&LA=en&LO=en-us" target="_hplink">over two million individuals</a>, either through the cabinets or independent agencies. Many Republicans have complained that the federal workforce has ballooned during the Obama administration, and while the raw number of employees has risen by <a href="http://www.thefactfile.com/2012/01/23/the-size-of-the-federal-workforce-rapid-growth-for-some-stagnation-for-others/" target="_hplink">14.4 percent</a> between Sept. 2007 and Sept. 2011, the percentage of public employees out of the total civilian workforce has <a href="http://www.thefactfile.com/2012/01/23/the-size-of-the-federal-workforce-rapid-growth-for-some-stagnation-for-others/" target="_hplink">remained fairly constant</a> around 1.2 percent since 2001. Much of the raw growth has been concentrated in the Department of Defense, Veteran's Affairs and Homeland Security.

  • Agricultural Subsidies - $30 - $33 Billion

    Democrats and Republicans agreed to cut as much as <a href="http://www.huffingtonpost.com/2012/11/12/fiscal-cliff-barack-obama-_n_2118739.html" target="_hplink">$30 billion</a> from agricultural subsidies; the main opposition fell along geographical lines rather than partisan ones. Hailing from an agriculture-heavy state, Sen. Max Baucus (D-Mont.) threatened to pull out of talks entirely if a deal included that much in subsidy reduction. The president ended up pushing for <a href="http://www.huffingtonpost.com/2012/11/11/fiscal-cliff-talks-medicare-social-security_n_2113259.html" target="_hplink">$33 billion in cuts</a>, but that figure also included reductions in conservation programs. Baucus now tells HuffPost any cuts should be made through the farm bill, not fiscal cliff talks.

  • Food Stamps - $2 to $20 Billion

    Cantor pushed hard for significant cuts to food stamps, formally known as the Supplemental Nutrition Assistance Program. He charged that the federal government could save as much as <a href="http://www.huffingtonpost.com/2012/11/11/fiscal-cliff-talks-medicare-social-security_n_2113259.html" target="_hplink">$20 billion over ten years</a> by eliminating waste and fraud, but the White House countered that the real number was closer to $2 billion. Instead, those cuts would force the program to scale back on the number of enrollees and the level of benefits it could offer.

  • Flood Assistance - $4 Billion

    Obama proposed cutting <a href="http://www.huffingtonpost.com/2012/11/12/fiscal-cliff-barack-obama-_n_2118739.html" target="_hplink">$4 billion from flood assistance</a> funding in his final offer to Boehner in July 2011. But Hurricane Sandy straining the National Flood Insurance Program; The New York Times <a href="http://www.nytimes.com/2012/11/13/nyregion/federal-flood-insurance-program-faces-new-stress.html?pagewanted=all&_r=0" target="_hplink">reports</a> that thousands of claims are being submitted daily, which could send the overall cost upwards of $7 billion for a program that suffers from a ballooning debt problem. And with climate change promising <a href="http://www.washingtonpost.com/blogs/capital-weather-gang/post/climate-change-predictions-foresaw-hurricane-sandy-scenario-for-new-york-city/2012/10/31/b78de428-2374-11e2-ac85-e669876c6a24_blog.html" target="_hplink">future flooding disasters</a> along the eastern seaboard, cutting the program looks unwise.

  • Home Health Care - $50 Billion

    The president offered to cut <a href="http://presspass.nbcnews.com/_news/2012/11/11/15089281-white-house-grand-bargain-offer-to-speaker-boehner-obtained-by-bob-woodward#.UKCJftkTtS8.twitter" target="_hplink">$110 billion over the next decade</a> from the government's health care spending, excluding Medicare. Among the programs that could lose crucial funding is home health care, where Democrats and Republicans agreed to <a href="http://www.huffingtonpost.com/2012/11/11/fiscal-cliff-talks-medicare-social-security_n_2113259.html" target="_hplink">$50 billion in reductions</a> over ten years. Cantor pushed for closer to $300 billion in spending cuts to health care, but Democrats appeared to stand firm.

  • Higher Education - $10 Billion

    The president proposed cutting <a href="http://www.huffingtonpost.com/2012/11/12/fiscal-cliff-barack-obama-_n_2118739.html" target="_hplink">$10 billion from higher education</a> over the next decade, mostly from Pell grants. <a href="http://www.huffingtonpost.com/2012/08/27/pell-grants-college-costs_n_1835081.html" target="_hplink">Over nine million students</a> relied on federal subsidized loans to afford college during the 2010-2011 school year, and the skyrocketing costs have continued to diminish the purchasing power of the Pell grant program. Obama has actively worked to make college more affordable for lower-income students. Key Republican lawmakers have attempted to cut funding for student loans; most notably, Rep. Paul Ryan (R-Wis.) slashed the maximum award from $5,550 per student per year down to <a href="http://colorlines.com/archives/2011/07/dems_students_fight_to_save_pell_grants_amidst_debt_ceiling_talks.html" target="_hplink">just $3,040</a>.

  • Medicaid And Other Health- $110 Billion

    The original funding levels proposed by Cantor and the GOP leadership would turn the entitlement program for America's poor into little more than a block grant program, Democrats claimed during the 2011 debt ceiling talks. Under such a program, they argued that states would then <a href="http://www.bloomberg.com/news/2012-09-11/medicaid-to-lose-1-26-trillion-under-romney-block-grant.html" target="_hplink">drop more people from enrollment</a> and scale back on health benefits. In fiscal year 2009, <a href="http://www.census.gov/compendia/statab/2012/tables/12s0151.pdf" target="_hplink">over 62 million Americans</a> -- many of them children -- depended on Medicaid for their health care. But the president did agree to <a href="http://presspass.nbcnews.com/_news/2012/11/11/15089281-white-house-grand-bargain-offer-to-speaker-boehner-obtained-by-bob-woodward#.UKCJftkTtS8.twitter" target="_hplink">$110 billion</a> in cuts from Medicaid and other health programs.

  • Medicare - $250 Billion +

    Republicans pushed for a drastic overhaul to the entitlement program for America's seniors. Ryan infamously proposed turning Medicare into little more than a voucher system in which seniors would receive checks to purchase their own health care on the open market -- a plan that would ultimately <a href="http://www.huffingtonpost.com/kennethdavis/medicare-vouchers_b_1947804.html" target="_hplink">force individuals to shoulder more of the burden</a> for their health care costs. Democrats refused to accept changes similar to those in Ryan's plan. The president, however, was <a href="http://www.huffingtonpost.com/2012/11/11/fiscal-cliff-talks-medicare-social-security_n_2113259.html" target="_hplink">more open to other GOP suggestions</a> on Medicare. In his final offer to Boehner, he agreed cut $250 billion over the next ten years -- in part by increasing premiums for higher-income seniors and by raising the eligibility age from 65 to 67 (although over a longer time frame).

  • Tax Reform - $800 Billion - $1.6 Trillion

    Republicans have again and again <a href="http://www.politico.com/blogs/politicolive/0511/Boehner_Medicare_Medicaid__everything_should_be_on_the_table_except_raising_taxes.html" target="_hplink">decried any attempt</a> to raise taxes, either on the highest earners or on corporations. (A Democracy Corps/Campaign for America's Future survey shows that <a href="http://www.ourfuture.org/report/2012114508/cafdemocracy-corps-election-poll-2012" target="_hplink">70 percent of voters</a> support raising taxes on the wealthiest two percent of Americans.) Instead, Boehner has pushed for a <a href="http://www.huffingtonpost.com/2012/11/11/fiscal-cliff-talks-medicare-social-security_n_2113259.html" target="_hplink">comprehensive tax reform bill</a> that would lower the marginal tax rates while closing loopholes and eliminating deductions in order to raise around $800 billion in additional revenues. For many Democrats, <a href="http://online.wsj.com/article/SB10001424127887323551004578117152861144968.html" target="_hplink">that figure simply isn't enough</a>. White House Press Secretary Jay Carney announced Tuesday that the president was aiming for as much as <a href="http://takingnote.blogs.nytimes.com/2012/11/13/showing-backbone-on-the-debt/" target="_hplink">$1.6 trillion in new revenues</a>, and the president told reporters on Wednesday that it would be <a href="http://www.huffingtonpost.com/2012/11/14/obama-tax-cuts_n_2131256.html" target="_hplink">practically impossible</a> to raise the amount of revenue he wanted simply from closing loopholes and lowering rates.

  • Social Security - $112 Billion

    Social Security <a href="http://www.huffingtonpost.com/2012/11/14/fiscal-cliff-social-security_n_2130762.html?utm_hp_ref=mostpopular" target="_hplink">isn't driving the deficit</a>, yet Republicans have <a href="http://www.huffingtonpost.com/2012/11/11/fiscal-cliff-talks-medicare-social-security_n_2113259.html" target="_hplink">pursued drastic changes</a> to the program. Sen. Harry Reid (D-Nev.) has promised that Social Security would be <a href="http://livewire.talkingpointsmemo.com/entry/reid-no-messing-with-social-security" target="_hplink">off the table</a> in the on-going negotiations to avoid the fiscal cliff, but Obama did concede to tying the benefits to a <a href="http://presspass.nbcnews.com/_news/2012/11/11/15089281-white-house-grand-bargain-offer-to-speaker-boehner-obtained-by-bob-woodward#.UKCJftkTtS8.twitter" target="_hplink">recalculated Consumer Price Index</a> that would ultimately provide less money to retirees. Sen. Bernie Sanders claims that, under such a measure, seniors who are currently 65 years-old would see their benefits drop by <a href="http://thehill.com/homenews/senate/267079-reid-assures-sanders-he-wont-agree-to-social-security-cuts-in-debt-deal" target="_hplink">$560 a month in 10 years</a> and by as much as <a href="http://thehill.com/homenews/senate/267079-reid-assures-sanders-he-wont-agree-to-social-security-cuts-in-debt-deal" target="_hplink">$1,000 in 20 years</a>. The Moment of Truth project (led by the two former co-chairs of the president's deficit reduction commission, former Sen. Alan Simpson (R-Wyo.) and former White House Chief of Staff Erskine Bowles) claims that the recalculated CPI could save as much as <a href="http://www.inthesetimes.com/article/11767/the_social_security_cut_washington_does_not_want_you_to_understand/" target="_hplink">$112 billion</a> from Social Security over the next ten years.

  • Tax Loopholes And Deductions - Up To $180 Billion

    Although Cantor and other GOP House members demanded that any deficit-reduction deal brokered in 2011 be classified as <a href="http://www.huffingtonpost.com/2012/11/11/fiscal-cliff-talks-medicare-social-security_n_2113259.html" target="_hplink">revenue-neutral</a>, they were open to closing particular loopholes in the corporate tax code and limiting itemized deductions for individuals -- given that they were offset by other tax cuts. Out of the $50 billion in savings to be found over the next decade from closing loopholes, Cantor proposed getting $3 billion from eliminating the break for corporate-jet owners and another $20 billion from voiding the subsidies for the oil and gas industries. On the individual earner side, he proposed eliminating the second-home mortgage deduction for $20 billion, as well as limiting the mortgage deduction for higher-income households to rake in another $20 billion. He also offered to tighten the tax treatment of retirement accounts. But Democrats wanted to see even greater action taken on itemized deductions. In June 2011, Rep. Chris Van Hollen (D-Md.) proposed raising $130 billion in new revenues by capping itemized deductions at 35 percent for the highest income brackets. The GOP response to his proposal at the time was a resounding "no."

  • Bush Tax Cuts For The Wealthy - $950 Billion

    Set to expire on Dec. 31, 2012, the Bush tax cuts represent one of the most controversial elements of the so-called fiscal cliff. They added over <a href="http://graphics8.nytimes.com/images/2011/07/24/opinion/sunday/24editorial_graph2/24editorial_graph2-popup.gif" target="_hplink">$1.8 trillion to the deficit</a> between 2002 and 2009. Yet Republicans argue that an extension is necessary to create jobs and spur economic growth. But a <a href="http://tpmdc.talkingpointsmemo.com/PDF/0915taxesandeconomy.pdf" target="_hplink">study</a> from the Congressional Research Service found that tax cuts for the wealthiest earners had little economic effect. The White House is pushing for a renewal only of those tax breaks for the lower- and middle-class Americans in order to save the average middle-class family <a href="http://money.cnn.com/2012/10/01/pf/taxes/fiscal-cliff-tax/index.html" target="_hplink">between $2,000 and $3,500</a> next year. Letting the cuts expire for those earning over $250,000 a year -- or the wealthiest two percent of Americans -- would haul in <a href="http://www.offthechartsblog.org/cbo-ending-high-income-tax-cuts-would-save-almost-1-trillion/" target="_hplink">$950 billion</a> in savings over the next decade, according to the CBO. Obama stressed how much the country stood to gain from such an approach Wednesday during a press conference. "If we right away say 98 percent of Americans are not going to see their taxes go up — 97 percent of small businesses are not going to see their taxes go up," he said. "If we get that in place, we're actually <a href="http://www.cnbc.com/id/49821777" target="_hplink">removing half of the fiscal cliff</a>."

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Sources
1. Niall Ferguson, "The Ascent of Money", The Penguin Press: New York, 2008, p. 260.
2. Canadian federal expenditures were $280 billion in 2012, data obtained from Department of Finance, "Update of Economic and Fiscal Projections", 13 November 2012, Table 3.4, http://www.fin.gc.ca/efp-pef/2012/efp-pef-03-eng.asp#s3.4.
Canadian GDP was $1,823 billion in Q3 of 2012, Statistics Canada http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/gdps02a-eng.htm
3. US federal expenditures were $3,795 billion USD in 2012 and GDP for the same period was $15,601 billion USD, data obtained from US Government Spending: http://www.usgovernmentspending.com/year_spending_2012USbf_13bs1n_G0F0F1#usgs302. Site visited on December 28, 2012.
4. Canadian military expenditures were $19.8 billion in 2012, data obtained from Treasury Board of Canada Secretariat, "2012-13 Estimates", p. 30, p. 247, http://www.tbs-sct.gc.ca/est-pre/20122013/me-bpd/me-bpd-eng.pdf.
5. US military expenditures were $902.2 billion in 2012, data obtained from US Government Spending, http://www.usgovernmentspending.com/year_spending_2012USbn_13bs1n_30#usgs302.

 

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