As President Barack Hussein Obama, his administration, and his economic advisors (czars) embark on their fourth year, they have searched about, baffled about how to get the US economy growing. But all Obama need do is look at Canada, whose solid growth is the product of tax cuts, fiscal discipline, free trade, and energy development.
“There would have been a day when we would have been the Greece of today,” recalled then Canadian prime minister Jean Chrétien, a Liberal who ended up chopping cherished social programs in one of the most dramatic fiscal turnarounds ever. Canada’s shift from pariah to fiscal darling provides lessons for Washington DC as lawmakers find few easy answers to the huge US deficit and debt burden.
Canada’s close call with disaster had been building for a long time. Over a decade earlier, in the 1980′s, top Finance Department officials had begun speaking about the problem of rising debt, a hangover from the big government era of the 1970s. The period before Jean Chrétien came to power in Canada is often likened to the situation in the US today. The country was not yet peering over a precipice, but was fast approaching it. The turnaround began with Chrétien’s election as Canadian prime minister in 1993. “I said to myself, I will do it. I might be prime minister for only one term, but I will do it.”
As of October, 2011, Canada’s Gross Domestic Product (GDP) grew by 3.075 percent over last year compared with the US GDP growth of 2.775 percent. Further, the Government debt as a percent of GDP (for all of 2011) was 102.6 percent for the US and 33.7 percent for Canada. For 2011, the deficit as a percentage of GDP in 2011 was 1.9 percent for Canada, with the forecast for next year to be 1.1 percent. By comparison, the US deficit as a percentage of GDP in 2011 was 8.61 percent, with a forecast for next year to be 6.86 percent.
Canadian Prime Minister Stephen Harper announced on December 29 that he will reduce the corporate tax rate to just 15 percent. It was 22.12 percent in 2007. The US rate is 35 percent. Provinces have also been lowering corporate tax rates. Back in 2000, the combined federal/provincial corporate tax rate in Canada averaged 43 per cent. Total taxes for businesses in Canada will be 25 percent in 2012.
Canada has pursued its competitive advantage, oil. And it did so not through top-down industrial policy, but by getting government out of the way. Harper has enacted market friendly regulations to accomplish big things like the Keystone Pipeline.
Harper is very popular for shrinking government. “The Harper government has pursued a strategic objective to disembed the federal state from the lives of citizens,” wrote University of Calgary Professor Barry Cooper. Canadian debt fell to 29 per cent of GDP in 2008-09 from a peak of 68 per cent in 1995-96, and the budget was in the black for 11 consecutive years until the 2008-09 recession.
All of this activity has had a positive effect on the Canadian dollar and upon its bonds (sovereign debt). Canada’s dollar traded stronger than the US dollar on average in 2011, averaging 98.92 Canadian cents per U.S. dollar in 2011. “Years of conservative practices by our government, central bank and various regulators have contributed to a steady economy and now a currency that is relatively stable to other majors,” said C.J. Gavsie, managing director for foreign-exchange trading at Bank of Montreal in Toronto. Canada and the U.K. are the only Group of Seven countries that have both a AAA rating and a “stable ” outlook, according to data compiled by Bloomberg. Canada’s government bonds rose in 2011, driving yields to record lows. Canada’s benchmark 10-year yields fell to 1.94 percent, compared with 3.12 percent at the end of last year. The key point here is that the yield is dropping. For comparison, US 10-year bonds yielded 1.88 percent on December 30, 2011, and 3.3 percent at the end of 2010.
Canada’s incomes are rising, its unemployment is two percentage points below the US rate, its currency is strengthening, and it has Triple-A or equivalent sovereign ratings from the five top international ratings agencies. These sound principles of tax cuts, fiscal discipline, free trade, and energy development work every time they are tried, and they have led to a transformation in Canada. Just imagine what they could do in the US.
The key phrase here is, “work every time they are tried.” Liberals (or progressives as they now like to be called) can point to no economic policies that ever worked for more than a very short time. Yet conservatives can point out that history is replete with conservative economic policies that worked for sustained periods.
Bottom line: It takes political guts, something of which Obama is in very short supply!
But that’s just my opinion.