1. Deficits, Debt and Climbing Back Out: Lessons from Canada

2. Deficits, Debt and Climbing Back Out Canada – back from the brink Canada – back from the brink The U.S: Will the Canadian solutions work? The U.S: Will the Canadian solutions work?

3. U.S. Deficits Have Been Deepening Budget Surplus/Deficit (Billions of $US) Source:Congressional Budget Office

4. The Debt Figures are Staggering U.S. Debt/GDP Source: U.S. Budgets

5. But Money Keeps Flowing In.. Foreign Assets in the U.S., Net Capital Source: U.S. Treasury, St. Louis Federal Reserve (FRED)

6. And the U.S. Dollar Stayed High for a Long Time Source: St. Louis Fed (FRED) U.S. Dollar against a basket of currencies

7. But things have changed…

8. Why Have Things Gone in Separate Directions?? Source: Canadian Business Magazine Public Debt Index, 1990 =100

9. Canada: Back from the Brink

10. Canada Had Years of Reckless Spending Program expenses (Millions of $C) Source: Canadian Department of Finance

11. Deficits Got Progressively Bigger Budget Surplus/Deficit (Millions of $C) Source: Canadian Department of Finance

12. And So Did the Debt Accumulated Deficits ($C) Source: Canadian Department of Finance

13. Which Kept Claiming a Bigger Share of the Economy Accumulated Deficits/GDP Source: Canadian Department of Finance

14. Meaning Debt Payments Claimed a Bigger Share of Expenditures Gross Public Debt Charges/Total Expenditures Source: Canadian Department of Finance

15. The Canadian Dollar was Sinking Source; St. Louis Federal Reserve/FRED $Cdn/$U.S.

16. In 1995, the Wall Street Journal referred to the Canadian Dollar as the ‘Northern Peso’ In 1995, the Wall Street Journal referred to the Canadian Dollar as the ‘Northern Peso’

17. And the Ratings Agencies Weren’t Impressed Either.. Moody’s put Canada on credit watch in the fall of 1994, then downgraded the debt from ‘AAA’ in 1995 Moody’s put Canada on credit watch in the fall of 1994, then downgraded the debt from ‘AAA’ in 1995

18. It Kept Getting Worse... Canada’s Finance Minister warned that the IMF might impose conditions on Canada Canada’s Finance Minister warned that the IMF might impose conditions on Canada

19. Eventually there wasn’t much choice...and the public bought into the need to turn things around...

20. Spending Cuts Were the Tool of Choice... In the 1995 budget, there were 6 to 7 dollars in expenditure cuts for every dollar of increased taxes In the 1995 budget, there were 6 to 7 dollars in expenditure cuts for every dollar of increased taxes

21. Program Spending Plummeted Program expenses (Millions of $C) Source: Canadian Department of Finance

22. The Public Sector was Slashed The Federal civil service was slashed by 15% (or more) The Federal civil service was slashed by 15% (or more)

23. Provincial Grants were Amended Federal transfers to the provinces were slashed by 14%, forcing welfare reform within provinces Federal transfers to the provinces were slashed by 14%, forcing welfare reform within provinces

24. Canadian Taxes were Cut Corporate taxes, taxes on corporate capital and personal income and capital taxes were reduced Corporate taxes, taxes on corporate capital and personal income and capital taxes were reduced

25. But the ‘GST’ was Introduced To pay for the tax cuts, Canada brought in a value- added tax To pay for the tax cuts, Canada brought in a value- added tax

26. By Luck, Interest Rates Went Down Government of Canada Marketable bonds 5 -10 year maturity Source: Bank of Canada, Statistics Canada

27. Debt Payments Fell Gross Public Debt Charges/Total Expenditures Source: Canadian Department of Finance

28. The Economy Improved the Next Few Years Canadian Unemployment Rate (%) Source: Statistics Canada

29. The Books were Balanced in Three Years Budget Surplus/Deficit (Millions of $C) Source: Canadian Department of Finance

30. Debt Started to Consume a Lesser Share of the Canadian Economy Accumulated Deficits/GDP Source: Canadian Department of Finance

31. Part I: The U.S.: Can it Learn from Canada?

32. The U.S. Has a Worse Deficit Problem than Canada Did Deficit/GDP Ratios Source: Canadian Department of Finance, U.S. Budget for 2012

33. The Same is True of Debt Public Debt/GDP Ratios Source: Canadian Department of Finance, U.S. Budget for 2012

34. Government was a Bigger Share of Canada’s Economy Government Outlays/GDP Source: Canadian Department of Finance, U.S. Budget for 2012

35. The U.S. is in a Better Situation on Interest Payments – for Now Gross Public Debt Charges/Total Expenditures Source: Canadian Department of Finance, U.S. 2012 Budget

36. You Cannot Cut Discretionary Spending Enough to Balance the Books To balance the books in the U.S. by cutting spending alone would need cuts in discretionary spending of 48% a year Source: George Washington University

37. The Big Decisions Have to Be Made Social Security, Medicare and Medicaid – are what’s on the table

38. And the Wars are Pretty Expensive The two wars fought by the U.S. over the past decade have meant bills of $1.3 trillion

39. One Difference: Monetary Policy Can’t be Adjusted Too Much The Bank of Canada was able to offset tight fiscal policy with loose monetary policy – but the Fed can’t loosen much more Interest rates have hardly any room to fall

40. Which Means Less Relief on Debt If interest rates can’t fall, then the U.S. won’t get the same relief on debt payments that Canada did

41. The U.S. Has Made the Transition Before… In the post-war world the U.S. cut spending, and the economy boomed anyway…but things are different this time

42. The U.S. Economy is Not Back to Pre- Recession Levels %change in U.S. GDP $K Source: BEA

43. The Unemployment Rate is Stuck U.S. Unemployment Rate

44. But given that there is not much choice.... What are the costs???

45. One Concern: Lower Economic Growth Even though current plan has cuts back-end loaded, economic growth will be necessarily lower Also – cuts will hit as population ages

46. One Concern: Deflation Too much in terms of cuts without private sector offset could be deflationary At the least – probably good for bonds

47. So What’s the Payoff???

48. Canada Got Hit Less During the Recession GDP by country, 2008 Q1 =100

49. Nobody Laughs at the Loonie Now Source; St. Louis Federal Reserve/FRED $Cdn/$U.S.

50. And Canada is a “AAA” Credit all around…

51. Canada Can Even Spend if it Has To... If there is another recession Canada has some room to expand fiscal policy – or to lower interest rates

52. The Canadian plan may not be a perfect fit, but it is an example of what worked once…

53. And there may be some lessons n it of what might work again…