Maybe We Need to Follow Canada's Blueprint to Fiscal Solvency

Maybe We Need to Follow Canada's Blueprint to Fiscal Solvency

It wasn’t so long ago when Canada found itself heading down the same path of economic destruction that we are on today.  What differentiates them from much of the rest of the developed world, is the approach they were forced to take in dealing with their escalating economic crisis.

In the early 1990s, Canada was facing a debt-to-GDP ratio of nearly 80 percent and federal spending had reached 23 percent of GDP.  Our debt-to-GDP ratio has already surpassed 100 percent and federal spending has ballooned from a historic rate of 18 percent to around 25 percent today.

Canada was forced to make changes because rising interest rates caused their debt service to consume one-third of all federal revenue.  We currently pay only about 6 percent of our federal budget to service our debt, as a direct result of the Fed buying over 3/4 of all newly issued debt and doing so at artificially low interest rates. 

In fact, Bill Clinton recently warned that if interest rates were the same today as when he was president, debt payments would increase from $250 billion to $650 billion per year.  He acknowledged that as the economy starts to grow, “interest rates will go through the roof, the cost of financing the deficit will be staggering . . .”

Estimates are that within four years and a return to the historic norm of 4.75 percent, interest will cost us as much as all discretionary spending, defense and non-defense combined.  We have the advantage of being the world’s reserve currency and subsequently, the luxury of more time to either fix the problem or make it significantly worse. 

Canada solved its fiscal problems by drastic reductions in government spending and personal and corporate tax cuts. The Liberal party, in power at the time, slashed the budget by approximately 10 percent over two years.  According to Paul Martin, Canada’s finance minister during this time, it was not ideology that led the government to make these dramatic cuts; rather it was “arithmetic,” or, in other words, reality.   Even health care spending was reduced and money was given as block grants to the provinces to limit federal risk.

During this most recent world economic crisis, Canada has followed much the same course and has found itself rebounding while the US continues to stagnate.  In January of this year, they cut their corporate tax rate to 15 percent, cut another 2 percent from the federal budget, and this time didn’t have to touch health care and other entitlement spending because they already got it under control 15 years ago.

Congress only has power to control about 38 percent of our spending because the rest is “mandatory,” including Medicare, Medicaid, Social Security, and debt servicing.  

Over the next 17 years, we will have 10,000 citizens turning 65 every single day, and most of them are relying on at least two of these programs.  

The free market must be allowed to compete for health care dollars in a way that hasn’t been done since before the implementation of Medicare and the skyrocketing healthcare costs that accompanied that interference. Paul Ryan’s plan of giving seniors a set amount of money each month to be used to purchase their own health insurance would go a long way to solving this problem.

The eligibility age for Social Security must be raised and its rate must be indexed to inflation, as opposed to wages.

From 1970 to 2008, median income rose, in inflation-adjusted dollars, just over 32 percent while federal government spending increased 221 percent.  Since then, we’ve experienced a nearly 5 percent reduction in family income and federal spending has only accelerated.

If we want to see more money coming into Washington, the answer isn’t to raise the tax rates on people whose incomes have continued falling throughout this recovery; the answer is to implement policies that encourage private sector growth and lead to more tax dollars being paid by people with rising incomes, at lower rates, just as Canada did.

It’s time to slash corporate tax rates to at least 15 percent, extend the Bush tax cuts for at least 10 years, reform entitlement spending to limit its growth, and cut 10-12 percent of discretionary spending from the federal budget. 

The longer we wait to make the necessary changes, the worse the problem will become and the more painful will be the cure when it finally is forced upon us. If we choose to elect individuals who will enable our irresponsibility, then we deserve the financial Armageddon we will get.

Chuck Warren is a Partner with Silver Bullet, LLC, a Nevada-based public affairs firm specializing in initiative qualification, grassroots and crisis communication.  He is on the board of directors for Pass The Balanced Budget Amendment.

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