Monday, October 15, 2012

Canada's Return from the Fiscal Abyss

"What's the difference between Greece and the U.S.?   About six years" ~ bond trader joke at CME.

Insight: Lessons for U.S. from Canada's "basket case" moment reports how Canada turned around its budget crisis from 1994 which has enabled it have a short Great Recession and current economic success.  Canada went from a debt of 67% of GDP in 93/94 to a debt of 34% of GDP today.  From 1997 to 2007, Canada's economic growth was 3.3% versus 2.9% for the U.S.   In 1995 the exchange rate was $.72 U.S. to $1 CDN.  Today, the exchange rate is parity: $1 U.S. to $1 CDN.

The U.S. could learn from the strategies of the Canadian government for that time period. I listed two key elements below:

  • Political courage.    The Canadian politician decided to address budget issues, despite the belief they would be likely one term and out.  The politicians made spending cuts in just about  every program, even the National Health Care program.  Everyone shared the pain and everyone contributed to the solution.

    The Liberal party decided being  fiscal conservatives meant being a good Liberal.    The members realized the cutting all programs versus protecting some would mean the survival of all programs.

  • Focus on spending cuts.  The strategy cut spending seven times more than raising taxes.  The reason:  "There was more need on one side than the other," according to prime minister.
  • Compare that with the U.S. where programs are protected from spending cuts by both Republicans and Democrats and the Democrats are proposing more tax revenue than spending cuts.

    Of course, some argue that the Canadian economy is about the size of California making the strategies not scalable to the U.S.   That may be true, but nothing else has been demonstrated to work.  Perhaps, we should start with California, which is probably a couple years from looking like Greece.

    For more on Strategies and Plans, check back every Monday for a new segment.

    This is not financial or policy advice. Please consult a professional advisor.

    Copyright © 2012 Achievement Catalyst, LLC

    No comments: