Skip to main content
opinion

It's not often the United States looks to Canada as a model, except in hockey.

But Americans could use a hefty dose of Canada right now as they grapple with reckless budget deficits and the aftershocks of Friday's debt downgrade by Standard & Poor's.

Canada has been there, done that – in the 1990s.

"American policy makers might learn a thing or two from Canada's patient, hysteria-free pruning," The New York Times pointed out recently.

The newspaper went on to applaud Canada's "thoughtful" review of government spending in the mid-1990s that saw the country pare its debt without sacrificing economic growth.

But it isn't just spending cuts that dug Canada out of debt trouble. Tax reform, including the contentious introduction of the goods and services tax in 1991, provided Ottawa with a surge of revenue, without hitting up wage earners and businesses.

Americans must similarly get used to the unpalatable notion of getting less from their government, and paying more for it.

There's a yawning gap between the government Americans have now – the large military plus generous health and pensions benefits – and the one they're willing to pay for.

Government expenditures, including state and local, are running at 41.2 per cent of GDP in 2011, roughly similar to Canada's 42-per-cent ratio, according to the International Monetary Fund's April fiscal monitor.

It's a very different story on the revenue side. The United States collects just 30.5 per cent of GDP in revenue to pay for its big government. The ratio in Canada is 37.4 per cent, or roughly in line with the average of 35.6 per cent among advanced economies.

Last week's debt ceiling deal doesn't confront this unsustainable mismatch. And there's scant evidence of a thoughtful debate as a special 12-member U.S. congressional committee prepares to find an extra $1.5-trillion (U.S.) worth of spending cuts or tax hikes. The committee must report by the end of November, which leaves little time to forge a national consensus.

Tax hikes are a non-starter for most Republicans. And many Democrats won't accept the fact that future generations may not get the same Social Security and Medicare benefits that current retirees enjoy.

It's pretty clear where the United States must go. Numerous bipartisan commissions and tax forces have laid out a roadmap. But getting there won't be without pain.

There will be major spending cuts, and nothing should be off the table, including the military and entitlement programs.

If there's going to be an honest effort to get government spending and revenue in sync, tax hikes must also be a key part of the solution.

Hard as it may be for many Americans to swallow, they'll probably have to sacrifice some popular tax breaks, lose some universality via means-testing and, ultimately, pay higher taxes and fees.

The net result will be a system that looks a lot more like Canada – a hybrid between the European and North American models. The upside may be a narrower gap between rich and poor.

Atop the hit list of tax breaks to scrap is the $100-billion-a-year mortgage interest deduction. The tax break is one of the root causes of the now-burst housing bubble. And it's proven to be a poor way to encourage homeownership. In Canada, where there is no tax break, the rate of homeownership is actually slightly higher (68 per cent versus 67 per cent). And unlike the United States, where the deduction encourages overleverage and overspending, Canadians have a strong incentive to pay down their mortgages as fast as possible.

The $700-billion a year Bush-era tax cuts must also go because they overwhelmingly benefit the wealthy in a country that already has virtually the largest income inequality gap in the OECD, the club of the world's richest countries.

Another healthy step would be an honest debate about Social Security and Medicare. Americans must eventually pay more in premiums and get less in return – just as Canadians did to save the Canada Pension Plan.

And like Canada, the U.S. should also raise taxes on consumption and cut rates on production. Right-wing activist Grover Norquist, president of Americans For Tax Reform, is fond of saying that vale-added tax is "French for big government." But it's also Canadian for competitiveness, allowing this country to lessen the relative tax burden on businesses and wage earners.

No wealthy country generates less from taxes on goods and services than Americans – 4.6 per cent of GDP versus 7.6 per cent in Canada. The ratio in many European countries is north of 10 per cent.

And finally, raising rock-bottom U.S. fuel and alcohol taxes would bring in much-needed revenue, while also discouraging consumption.

The way out need not be bigger government, as many Republicans fear. It's about saving the best of the government the U.S. has now.

The health of the global economy depends on Americans doing the right thing.

Interact with The Globe