Follow Canada's Lead to Reduce Federal Debt

In 1996 Canada's debt to gross domestic product (GDP) ratio was approximately 67 percent -- just slightly higher than the United States' current ratio of approximately 62 percent.  Canada's Liberal Party was in charge of the federal government at the time and set out on a determined course to cut Canada's federal deficit and reduce the federal debt as a percent of the economy's GDP.  The plan was hugely successful, and when Finance Minister Paul Martin became prime minister in 2003, he continued the policy of spending restraint until he left office in 2006.  Martin's successor, current Prime Minister Stephen Harper, continued that policy for the next two years.  The result: by fiscal year (FY) 2009, the federal debt had fallen to 29 percent of GDP, say David R. Henderson, an associate professor of economics, and Jerrod Anderson, a second-year master's fellow, at the Naval Postgraduate School.

• The federal government achieved these reductions in debt not with large tax increases, but with substantial cuts in government spending.
• While Martin's 1995 budget did increase some taxes, the budget called for six to seven dollars in expenditure cuts for every dollar of increased taxes.
• Between FY 1995 and FY 1998, federal government program expenditure (government spending minus interest payments on the federal debt) decreased from C$123.2 billion to C$111.3 billion, a decrease of C$11.9 billion.

Lessons for the United States:

• Starting in 2013, raise the age eligibility for Medicare in incremental steps (for example, two months every year) until it equals the Social Security age.
• Starting in 2014, allow doctors to "balance bill" under Medicare instead of having the so-called doc fix under which payments to doctors would be increased.
• Begin making Medicaid payments to states via block grants.

Source: David R. Henderson and Jerrod Anderson, "Canada's Reversed Fiscal Crisis," Mercatus Center, May 2011.