Congressional lawmakers met last week to try to hammer out a deal to avert the fiscal cliff. Democrats insist on revenue increases as part of such a deal, saying new revenue is the only way to significantly reduce the national debt. However, it is not a lack of revenue that is driving us debt; it is unrestrained federal spending. American lawmakers looking to solve America’s looming fiscal crisis need not look further than Canada.
Highlighted at a recent Cato Institute conference, our neighbor—and competitor—to the north serves as a good example of what it takes to return to a strong economy. The Great White North has turned around its fiscal situation and is now experiencing financial stability and economic growth.
In Canada, federal spending has been trending downward since 1993, according to Cato’s Chris Edwards. Canadians have cut spending in virtually every area except health care. The federal government now accounts for only 38 percent of total government spending. In the U.S., by contrast, the federal government accounts for 71 percent of total government spending.
The Canadian government, among other changes, altered benefit schedules for the Canadian Pension Plan to reduce the total amount of benefits paid.
In a similar vein, The Heritage Foundation suggests a variety of benefit changes to Social Security that would strengthen the program’s finances, for example, by raising the eligibility age slightly and replacing cost of living adjustments with the Chained Consumer Price Index for a more targeted measure of inflation in consumer goods. Bolder changes include gradually introducing a flat benefit that targets scarce resources to those seniors who need them the most and provides all seniors with protection from poverty in retirement.
Canada also cut corporate income tax rates. The U.S. has the highest rate among its competitors in the industrialized world. The combined federal and state corporate rate in the U.S. is over 39 percent. Canada now has a combined rate of only 25 percent.
Contrary to popular expectations, lower corporate tax rates have not resulted in significantly reduced corporate tax revenue in Canada. Instead, corporations based in Canada have reported more income since lower tax rates went into place. And Canada is experiencing low unemployment and a strong Canadian dollar.
The Heritage Foundation’s New Flat Tax would replace today’s complex tax system for individuals and business with a simple, neutral, and transparent tax system that would allow America to achieve its full economic potential.
Europe has not followed Canada’s example, and the resulting severe debt crises are sending people to the streets in an outbreak of violent protests. Out-of-control government spending and deficits have resulted in massive borrowing, which has led to bailouts for many European countries.
High levels of spending on social welfare programs are at the heart of the problem. Greece, for example, spent 42 percent of its federal budget on social benefits in 2009, according to Aristides Hatzis from the University of Athens. Spain is slated to spend 63 percent of its budget on social expenditures in fiscal year 2013, according to Pedro Schwartz from Universidad San Pablo CEU.
Here in the United States, we have all the ingredients necessary to create a similar debt crisis in the not-so-distant future. Over the past four decades, federal spending has increased 288 percent, nearly quadrupling in real terms. Thirty-two cents out of every dollar spent was borrowed in 2012. Debt held by the public is a staggering 73 percent of GDP, and our government has run trillion-dollar budget deficits four years in a row.
In less than 10 years, the U.S.’s publicly held debt will surpass the size of the entire U.S. economy and is projected to continue skyrocketing from there. (continues below chart)
To make matters worse, there is a dark demographic cloud on the horizon. In all Western nations, the proportion of older people as a share of the population is increasing. In the U.S., baby boomers are increasingly reaching retirement age, and in Europe, fertility rates are well below replacement level. As the populations of these countries age, entitlements will eat up an ever-increasing share of federal spending and place a greater strain on a smaller share of working-age taxpayers.
Solving America’s spending and debt challenges is possible. Canada’s example illustrates some of the steps this will take—including major cuts to federal spending, tax reform, and entitlement reform. If our leaders can find the courage to pursue this path, we can avoid an economic collapse and Save the American Dream.
Paul Bremmer is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/about/departments/ylp.cfm.