I've referred on this blog a number of times to "Canada's Budget Triumph," my 2010 study for Mercatus on the successful budget cuts the Canadian government undertook from 1994 to the early 2000s. Here's one line from my study that sums up one of the key messages:
The result of years of cuts in government spending was that, as a percent of GDP, federal spending on programs [as distinct from interest on the federal debt] fell from a high of 17.5 percent in 1992-93 to 11.3 percent in 2000-01.
When I briefed this on Capitol Hill and when I've spoken about this in interviews, the push-back I've often got is that the United States can't do the same thing because Canada has a parliamentary system in which the executive branch and the legislative branches are one whereas the United States has a system in which the executive and legislative branches are separate. I agree that it's harder to do in the United States. But the evidence that it can be done is right under our noses: it's called the 1990s.
In 1990, total federal government spending, including interest on the federal debt, was 21.8 percent of GDP. By 2000, it was down to 18.4 percent of GDP, a 3.4-percentage-point drop. How did that happen? There were three factors:
1. Bush I and Clinton on military spending. Bush I, noticing that the Cold War had ended, started implementing cuts in military spending as a % of GDP. When Clinton came into office in January 1993, he kept on the glide path that Bush I had put in place. Result: Defense spending actually fell in nominal terms, from $299.3 billion in 1990 to $294.5 billion in 2000. As a % of GDP, it fell from 5.2 to 3.0, accounting for 2/3 of the drop.
2. The virtuous circle on net interest on the debt. As economic growth and restraint on program spending (federal spending that is not interest on the debt) kicked in, net federal debt peaked in 1993 at 49.5 percent of GDP and then fell to 35.1% of GDP by 2000. With a lower debt/GDP, interest payments on the debt were lower as a % of GDP, making the debt to GDP shrink further. Also helping were falling interest rates through the 1990s. Of course, with interest rates at or close to historical lows, we can't rely on that now. Net interest on the federal debt fell from 3.2% of GDP in 1990 to 2.3% of GDP in 2000, a fall of 0.9 percentage points.
3. Domestic spending: the dog that didn't bark. With the Republican Congressional victories in the November 1994 elections, Republicans took over both the U.S. House of Representatives and the U.S. Senate. Newt Gingrich, as the Speaker of the House, pushed hard for restraint in the growth of domestic spending. He got it. Domestic spending (which I define here as overall federal spending minus national defense minus international affairs minus net interest) fell very slightly from 13.0% of GDP to 12.9% of GDP.
Of course, the two reasons a fraction will fall are that the numerator falls and that the denominator increases. We had a boom in the 1990s. That's the denominator growing. But isn't that interesting? With many hundreds of thousands of jobs lost in the Department of Defense (military and civilian) in the defense-related industries, we had a boom.