David R. Henderson  

Henderson on Canada's Budget Cuts

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I got so busy with my classes in the last month or so that I neglected to highlight a follow-on study I, along with George Mason University student Jerrod Anderson, did for Mercatus. It is titled "Canada's Reversed Fiscal Crisis" and it came out last month. The National Post in Canada, roughly Canada's equivalent of the Wall Street Journal, did a piece on it. I also did a piece on it for Hoover Institution's publication, Defining Ideas. The piece is entitled "Northern Exposure."

Some highlights from the Defining Ideas article:

First, I took on the idea that all budget cuts cause "pain:"

We often hear that cutting government budgets causes "pain." Whether and to what extent that's true, though, depends on what is cut. By selling off its air traffic control system to a private non-profit company called NAV Canada, the Canadian government netted $1.4 billion and saved $200 million in annual subsidies. A big benefit beyond these savings is that NAV Canada has revolutionized air traffic control in Canada, putting the country decades ahead of United States in air traffic control.

Next, I reminded people of who achieved this substantial accomplishment: not the Conservative Party but the Liberal Party:
Who were the politicians who implemented these budget cuts and held to them for over a decade? Paradoxically, they were from the big-government, welfare-state-oriented Liberal Party that had dominated Canadian federal politics for 52 of the 72 years between 1921 and 1993. The two people most responsible for Canada's success in cutting budgets were Prime Minister Jean Chretien and Minister of Finance Paul Martin. Interestingly, Chretien had been an ally of Pierre Trudeau, the Liberal Party prime minister who, more than any other person, had been responsible for expanding government in Canada. Martin, the Minister of Finance from 1993 to 2004 and then Prime Minister from 2004 to 2006, was the son of Paul Martin, Sr. who was often called "the father of Medicare." Medicare is the name of Canada's "single-payer" health care system.

Next, I pointed out how Chretien and Martin used some of the budget surpluses:
The payoff for such budget cutting was a string of budget surpluses. In 2000, the government started a series of tax cuts. Chretien and Martin restored full indexation of tax brackets for the individual income tax so that inflation alone could no longer put people in higher brackets. With an eye on global competition for capital, they cut the flat corporate income tax rate, in stages, from 28 percent to 21 percent by January 1, 2004 and excluded 50 percent of capital gains from taxation, up from only 25 percent.

Also concerned about competition for highly productive labor, Martin and Chretien eliminated the five-percent surtax on high-income individuals and added a 26-percent bracket for the people in the lower-income portion of what had previously been the 29-percent bracket. Since then, the corporate income tax rate has been cut, in stages, to 16.5 percent, and Prime Minister Stephen Harper, recently re-elected with a Conservative Party majority, plans to cut the corporate tax rate to 15 percent in 2012. Canada's government is saying, in effect, "Give me your highly taxed owners of capital yearning to breathe free, I lift my lamp beside Calgary and Toronto."


In the Mercatus piece, I suggested places to cut government spending, including three wars:
End the U.S. government's participation in the wars in Iraq, Afghanistan, and Libya.

The National Post piece, by Jesse Kline, does contain one inaccuracy. He writes:
Federal spending as a percentage of GDP went from 18% in 1993 to 13% in 2009.

What he should have inserted after "spending" is "on programs." These numbers do not include net interest on Canada's federal government debt.


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CATEGORIES: Fiscal Policy



COMMENTS (4 to date)
HH writes:

Four wars. You forgot Yemen.

David R. Henderson writes:

@HH,
Touche, and I'll raise you to five: Pakistan.

Jack writes:

Good stuff, but don't forget post hoc ergo propter hoc. It is hard to find conclusive evidence either way (i.e., whether one is in favor of budget cuts or against them).

Mr. Econotarian writes:

An interesting part of the Canadian system is a lower Federal top income tax rate than the US, but higher tax rates at the Provincial level (top progressive rates range from 13% to 21%, or a 10% flat rate in Alberta).

Only a handful of US states have state progressive income tax rates higher than 10%, with Oregon's 11% being highest.

Canada has a 5% national sales tax, and most provinces have a 5-10% sales tax on top of that.

I'm intrigued by the decentralization concept of lowering Federal taxes while increasing state/provincial taxes to keep them closer to the potentially more accountable local politicians.

It should also be noted that Canada has lots of "block grant" programs, for example:

Canada Social Transfer is the Canadian government's transfer payment program in support of post-secondary education, social assistance and social services.

Canada Health Transfer is the Canadian government's transfer payment program in support of the health systems of the provinces and territories of Canada.

And in the US, we can't even move Medicare to block grants?

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