When Jean Chretien became prime minister in 1993, Canada faced a fiscal and economic breakdown. The government’s share of the economy had climbed to 53% in 1992, from 28% in 1960. Deficits had tripled as a percentage of gross domestic product over the prior two decades. Government debt was nearly 70% of GDP and growing rapidly. Interest payments on the debt took up 35 cents of every tax dollar.
Mr. Chretien and his finance minister, Paul Martin, took decisive action. “Canadians have told us that they want the deficit brought down by reducing government spending, not by raising taxes, and we agree,” Mr. Martin said. The new administration slashed spending. Unemployment benefits were cut by nearly 40%. The ratio of spending cuts to tax increases was nearly 7-to-1. Federal employment was reduced by 14%. Canada’s national railway and air-traffic-control system were privatized.
The economy rebounded. Between 1995 and 1998, a $36.6 billion deficit turned into a $3 billion surplus. Canada’s debt-to-GDP ratio was cut in half in a decade. Canada now has faster economic growth than America (3.3% in 2010, compared to 2.9% in the U.S.), a lower jobless rate (7.2% in June, when the U.S. rate was 9.2%), a deficit-to-GDP ratio that’s a quarter of ours, and a stronger dollar.
What’s most remarkable about the Canadian turnaround: It was led by liberals. Mr. Chretien and Mr. Martin were leaders of the Liberal Party. Yet they responded to the clear wishes of Canadians and, to the surprise of the political class, shifted to the right. Or to the center, the two leaders would say.
Today the United States is in a situation almost identical to Canada’s in the 1990s. Government spending is surging, a huge deficit and national debt are setting peacetime records, interest payments are soaring, the economy is stagnant, and unemployment is stuck at around 9%. Yet one thing is missing: Liberals in America refuse to lead.
Led by President Obama, liberals have held back, leaving conservatives to lead and then stymieing conservative proposals because they rely on spending cuts. Liberals have sought to protect domestic programs, including entitlements, from even small cuts.
It’s increased spending that is largely responsible for deficits exceeding $1 trillion for three consecutive years and thus for the rise in the national debt’s percentage of GDP from 40% in 2008 to 62% in 2011 and toward an estimated 72% next year. The public, in the 2010 election and in poll after poll, is insisting on spending cuts.
But the president has declined to present a specific plan of his own. The 2012 budget he sent to Congress in February is inoperative. His tack now is to comment on the debt-reduction plans of others. Just this week, the White House said Mr. Obama would veto the “cut, cap and balance” proposal approved by the House and attached to the $2.4 trillion hike in the debt limit the president has asked for.
Earlier, the president attacked the Republican budget passed by the House. And in five days of negotiations with congressional leaders last week, he backed away from some of the spending reductions that had been agreed to in talks led by Vice President Biden. Mr. Obama had already taken major spending programs, like his health-care program, the $53 billion rapid rail project, and funding for “green jobs,” off the table.
As the Aug. 2 deadline for a debt-limit increase nears, Mr. Obama has combined a very public role with an absence of upfront leadership. He’s had three press conferences in the past month without offering clear guidance. But since he has no plan, he’s less of a target for criticism, and he has tried to limit his accountability.
At his session with reporters last week he minimized the severity of the debt problem. “Here’s the good news,” he said. “It turns out we don’t have to do anything radical to solve this problem. Contrary to what some folks say, we’re not Greece. We’re not Portugal.” [Hello? Liberal Press – are you wake?????????????]
The fiscal trouble was caused over the past decade, Mr. Obama explained, by the Bush tax cuts, “a prescription drug program for seniors that was not paid for,” the wars in Iraq and Afghanistan, and “a bad recession that required a Recovery Act and stimulus spending and helping states . . . and there’s interest on top of that.” In other words, it wasn’t Mr. Obama’s fault.
What the president left out were the biggest drivers of spending and debt—entitlements. The Congressional Budget Office (CBO) projects Medicare, Medicaid and other health-care spending to jump to 9.5% of GDP over the next two decades from 5.6% in 2011. The CBO says Medicare will run out of money in 2020.
Like Mr. Obama, House Minority Leader Nancy Pelosi downplays the fiscal difficulty and recommends against offering a plan. “Once you put another proposal on the table, you’re conceding that there must be some big problem,” she said in April.
Senate Majority Leader Harry Reid is also a minimizer. He said this spring that changes in Social Security shouldn’t be considered until the program fails. “Two decades from now, I’m willing to take a look at it,” Mr. Reid said.
As America struggles over spending and debt, Canadians watch with wonderment. A new book, “The Canadian Century: Moving Out of America’s Shadow,” points to a role reversal—a strong Canada and a weak America.
In the foreword, former Canadian Ambassador to the U.S. Allan Gottleib writes: “If we want to see what would have become of Canada had we not lived through the difficult changes, we need look no further than Washington, D.C., where unreformed entitlements and undisciplined borrowing are hobbling America’s power to be a world leader.”
Mr. Barnes is executive editor of the Weekly Standard. An article he wrote on Canada’s resurgence appears in the Summer 2011 issue of National Affairs.
Fred Barnes: How Spending Cuts—Not Higher Taxes—Saved Canada – WSJ.com.