The U.S Fiscal Solution - Follow Canada's Lead

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Here is an article by David Rosenberg one of my favorite authors of morning news letters until he started charging $1000 a year for them. Fortunately, I was able to get a hold of this one which I found extremely interesting. It is quite long so I pasted relevant quotes for all to get the jest of what he is saying.

"As concerns over the mushrooming U.S. deficit and debt levels continue to mount, we are sending today our recent Special Report entitled The U.S. fiscal solution – follow Canada’s lead.Focusing on Canada’s successful 1990s battle to rein in its deficit and debt and bring itself back to a good fiscal place, the report covers how the U.S. in particular could benefit from following Canada’s example as a way to get its balance sheet back in order. As the report highlights, the U.S. will likely have years of painful retrenchment and tax increases, which will be contractionary in nature. The Canadian experience shows that fiscal recklessness can indeed morph into fiscal integrity, assuming that the political will is there."

"Over that time frame in which Canada swung from massive deficits tosurpluses, program spending as a share of GDP contracted from 17.4% to12.1%. That came out to a near-$50 billion haircut. But the revenue-yield —what the government takes in relative to GDP — also rose from 17% to 18.2%for another $10 billion squeeze on the population. A similar move towardsrestraint in the U.S. today would imply $1 trillion of tax and spending shifts, oralmost a percentage point drain out of GDP growth for at least the next halfdecade, if not longer. Canada did it most out of the spending side and as aresult today boasts one of the lowest top marginal corporate income tax ratesin the world."

"Considering that the starting point on the deficit ratios in the U.S. are muchworse, the retrenchment may be a lot tougher — but even a Canadian-style $1trillion restraint over a similar five-year period would clip real GDP growth byroughly one percentage points annually. That is a lot of pain, to be sure, butnot insurmountable given the rewards down the road of reclaiming one’sfiscal flexibility."

"One item worth noting: The problem for the U.S. is that the deficit ratio isabout twice as it was in Canada, and in Canada we had a government with amajority that could take charge without lobby or special interest groupsexerting an influence on the decision-making process."

Thoughts?