WSJ: “How Canada Saved Its Bacon”

Mary Anastasia O’Grady writes today in the Wall Street Journal how our neighbor to the north, Canada, dealt with its overspending problem in the mid-1990s. Former Canadian prime minister (and finance minister) Paul Martin of the left-of-center Liberal Party presided over a crisis of arithmetic during which spending commitments outstripped the ability of the Canadian people to pay.

The problem had been building over many years. In 1965, federal spending had been 15% of GDP. By 1993 it was 23%. Markets didn’t like it. Between February and March of 1994, the three-month Canadian Treasury bill rate went to 5.82% from 3.85%. The Mexican peso crisis in December of that year didn’t help. By February 1995 the interest rate on the Canadian Treasury bill reached 7.8%. In a world of increasing uncertainty and a flight to quality, Canada was paying dearly for its deteriorating risk profile. As the exchange rate sank, Canadians were getting poorer and the government was speeding toward a wall.

Were we to write a story about the United States’s current predicament, it might read eerily similar:

“The problem had been building over many years. In 1982, federal spending had been 22.64% of GDP with a deficit of -3.26%. By 2012, spending was 24.06% of GDP with a deficit of -6.84%–roughly double the deficit percentage from 30 years prior. Deficits over those three decades finally pushed the federal government’s debt to GDP ratio over 100% by 2012. In any other country that didn’t provide the world’s reserve currency, markets wouldn’t like it, but the Federal Reserve’s low interest policies and government bond purchases made it possible for the overspending to continue. In a world of increasing uncertainty and a flight to quality, the United States federal government did nothing to address the new debt piling up as the number of working Americans declined in relation to the Baby Boomers who began to claim Medicare and Social Security. As the gap between government spending and revenues widened, Americans were getting poorer and the government was speeding toward a wall.”

Luckily, we have Canada’s example from which to learn. As former center-left Canadian finance minister Janice McKinnon said, “Our only plea is that if you start tackling it before you hit the crisis stage, it’s going to be a heck of lot easier. The longer you wait, the worse it gets.”

Will politicians in Washington, D.C. recognize the best time to right-size the federal government is now?