The lead article in the new Cato Policy Report is entitled “We Can Cut Government: Canada Did.” The article reviews Canada’s economic reforms since the 1980s, which have included free trade, privatization, spending cuts, sound money, large corporate tax cuts, personal tax reforms, balanced federal budgets, block grants, and decentralizing power by cutting the central government.
Those all sound like things we ought to pursue in America. The political systems of the two countries are different, but Canada’s pro-market reform lessons are universally applicable.
Canada’s reforms, for example, refute the Keynesian notion that cutting government spending harms economic growth. Canadian federal spending was cut from 23.3 percent of GDP in 1993 to 16.5 percent by 2000. Keynesians and their macro models would predict a crushing economic blow from such a spending reduction. They would argue that the “austerity” would slash “aggregate demand” and “take money out of the economy.”
Yet Canada’s spending cuts of the 1990s were coincident with the beginning of a 15-year economic boom that only ended when the United States dragged its neighbor into recession in 2009. As the government shrank in size during the 1990s, the Canadian unemployment rate plunged from more than 11 percent to less than 7 percent.
Canada still has a large welfare state, and its provincial governments are prone to overspending. However, its experience shows that even a modest dose of public sector austerity combined with pro-market reforms can lead to substantial gains in private-sector prosperity. American and European leaders still under the Keynesian spell should take note.
Chris Edwards is the director of tax policy studies at the Cato Institute, and editor of www.DownsizingGovernment.org. Before joining Cato, Edwards was a senior economist on the congressional Joint Economic Committee, a manager with PricewaterhouseCoopers, and an economist with the Tax Foundation.
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