Posted at Americas Quarterly on April 6, 2011
Now is the season when governments of Canada and the United States present their budgets and outline their fiscal objectives as they pursue their respective economic recoveries. It seems long ago now, but I recall September 15, 2008 when the potential of an economic and financial horror descended on Western economies and threatened to unleash another global depression.
We all remember how the U.S. economy was well on its way to losing close to 15 million jobs. The world’s biggest economy had to bail out its financial sector through the Troubled Asset Recovery Program (TARP) in the midst of a presidential election. Now, developed economies are recovering slowly but surely—and the emphasis is not only on creating jobs but also restoring fiscal health following the recession.
In Canada, the path to fiscal responsibility began in the 1990s and culminated later that decade with balanced or surplus budgets at both the federal and the provincial levels. Canada resisted the deregulation bug of the financial sector, giving it an advantage when the worst recession since the 1930s hit. Deficits have returned but Canada’s financial sector did not need a bailout.
In the U.S., a robust job market in the 1990s aided measures undertaken to bring about fiscal health. At the end of the Clinton years, the country had balanced budgets and surpluses—allowing it to pare down the debt. Then 9/11 occurred, and fiscal restraint was to be tested severely.
President George W. Bush was elected and brought in the biggest tax cut for middle to high income earners in history. But wars in Iraq and Afghanistan compromised his good intentions and resulted in the highest deficit and debt in history by the end of his presidency.
President Obama, once elected, continued TARP to prevent financial collapse and brought in the American Recovery and Reinvestment Act (ARRA). While the U.S. economy has created over 1.8 million jobs in 13 months, the recovery remains modest. The Tea Party’s ascendance has accelerated the political conversation, now dominated by fiscal issues.
States are engaged in drastic cuts to maintain solvency, sometimes confronting with labor unions about their collective bargaining rights. Canadian provinces have had to once again begin severe austerity programs to restore fiscal health. The recession, not being as deep as in the U.S., has given the provinces an edge—but not a pass.
In the past two weeks, I have seen how two jurisdictions (Québec and New York) have handled their fiscal challenges.
Québec is now on schedule to eliminate its annual deficit in two years by balancing a mixture of significant cuts and raising targeted revenue. New York State has essentially balanced its budget on time by making significant cuts, while respecting an electoral promise not to raise taxes.
On April 8, it is possible that the U.S. federal government will shut down because of an impasse between the White House and House of Representatives. The accomplishments in Québec and New York could serve as models amid this showdown. Both the U.S. executive and legislative branches will have to examine both their spending and revenue measures. Exercising fiscal responsibility can be the path to leadership.
True, this process is not always easy—and certainly not devoid of passionate argument. But in the cases of New York and Québec, leadership requires tackling the problem and acting with courage to begin to restore fiscal health. This is what voters, who make choices every month to balance their own personal budgets, expect—and it works in the long run.