How the US is wrong to celebrate the fiscal cliff deal

January 7, 2013

OTTAWA, ON, Jan. 7, 2013/ Troy Media/ – As the American political class warmly congratulates itself over pulling back from the fiscal precipice, I predict that, in the very near future, this deal will not be seen as a victory but another lost opportunity for America to get back on the path of responsible behaviour.

It isn’t just that excessive borrowing is bad for public finances. The rot long-term deficit financing engenders eats away at a nation’s moral fibre, its work ethic and the freedom and self-reliance of its people.

As Canada learned to its great cost, a quarter century of never balancing the national budget – until the 1990s – left us in desperate straits. One of the world’s wealthiest countries, our currency was derided as the Northern Peso at a time when Mexico was a byword for fiscal calamity. We lost our AAA credit rating. Interest payments consumed a third of Ottawa’s revenues.

Every interest group that had won some public benefit unmatched by tax increases became part of a growing chorus of voices urging Canadians to regard deficits as normal and even progressive. They are nothing of the sort.

Not only did our budgetary incontinence leave our dollar and our finances in tatters, but our borrowing underpinned a dysfunctional welfare system that saw over 10 per cent of the population stuck on social assistance by the mid-1990s.

Canada’s newfound swagger, its self-confidence, its prosperity, all can be traced at least as much to a decision to break with the irresponsible fiscal past and pay our own way as to Olympic medals, Canadian governors of the Bank of England or pride in our military’s distinguished roles in Afghanistan and Libya. And although we have slipped back into deficit due to a severe global recession, our strong economic fundamentals saw us through that painful episode better than any other G7 nation.

South of the border, America remains gripped by the fear that dealing with its fiscal profligacy is beyond its strength.

This fear sweeps reason before it like autumn leaves buffeted by the cold north wind. Yet the Americans should take counsel and solace from one of their greatest leaders, who rightly reassured his people that they had nothing to fear but fear itself.

By ‘avoiding’ the fiscal cliff, Americans have put off yet again their day of fiscal reckoning, comforted by the illusion that the time is not yet right to tackle it. The time is never right, but the job must be done regardless, and the fiscal cliff deadline was as good a moment as any to get started.

According to much over-heated rhetoric, breathlessly repeated in the Canadian media, the fiscal cliff would have involved severe spending cuts. Rubbish. When Canada fixed its budget deficit in the mid-’90s, Ottawa cut its spending in absolute terms by seven per cent in two years. The fiscal cliff, by contrast, would have cut Washington’s overall spending by a paltry 0.3 per cent in 2013, while increasing it next year and for the foreseeable future.

Under the deal just agreed in Congress, spending cuts are put off, but taxes rise. That’s the exact reverse of what Canada learned works. Increased taxes in isolation from spending cuts give politicians the illusion that they can afford more spending because new revenues are flowing.

Canada’s supposed money-spinner, the GST, for example, did not eliminate the deficit. We balanced the budget only when we cut spending. In the great reforms under Jean Chretien and Paul Martin, spending cuts outnumbered tax increases five to one.

Putting new revenues in Congress’s hands not matched by significant spending cuts is virtually guaranteed to make the problem worse if Canada’s experience is any guide.

Perhaps America’s economy is too fragile for it to today tolerate Canadian levels of strong fiscal medicine. Even if America needs more time than we did, it needs a plan. None is in sight. Continuing with the current bad behaviour in the hope that something will turn up just makes the inevitable reforms more painful and leaves to fate rather than choice the moment when the piper gets paid. America deserves better.

Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.

This column is FREE to use on your websites or in your publications. However, Troy Media and the Macdonald-Laurier Institute, with links to their web sites, MUST be credited.

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