On debt, Canada shows us the way out
By Charles Lane | February 2, 2010; 12:11 PM
Wondering how seriously to take the Obama administration’s claims that its new $3.8 trillion budget plan represents fiscal restraint? Look northward, to Canada. Compared to the belt-tightening that government imposed on itself in recent years, Obama’s effort appears trivial indeed.
A new report from McKinsey Global Institute, “Debt and Deleveraging: The Global Credit Bubble and its Economic Consequences” tells the story. As of 1998, Canada’s total debt -- the combined obligations of government, households, financial and non-financial corporations -- stood at 240 percent of gross domestic product, up 44 percentage points from the 1988 level. Government, both provincial and federal, was responsible for much of the increase. And so government, especially the federal government under the leadership of Paul Martin, who served first as finance minister and then prime minister, led the way in debt reduction.
Ottawa cut farm and business subsidies, scaled back social programs (including health care) and eliminated 55,000 public sector jobs. Interest groups howled. But these measures reduced government debt from 84 percent of GDP in 1998 to 58 percent of GDP in 2005. By contrast, Obama’s latest plan contemplates growth in the U.S. federal debt from 53 percent of GDP last year to 77 percent in 2020. Chrystia Freeland and Paul Krugman have recently sung the praises of Canadian bank regulation, which kept the debt of its financial institutions down to a dull roar. Yet timely fiscal discipline is also a major reason that Canada has been able to confront the global downturn in the best overall financial shape of any major industrial country.
“Canada’s deleveraging episode provides a model for countries with highly indebted governments today,” the McKinsey Global Institute report notes. “The key requirement was the political will to force through unpopular government spending cuts.” Still no sign of that will in Washington.