30 November 2017

America’s fiscal lessons from the rest of the Anglosphere

By Sean Speer and Daniel Mahoney

Anglosphere countries such as the United Kingdom, Australia, Canada, New Zealand, and the United States have deep linkages of culture, institutions, and values. The ideas that animate our politics are generally common.

Yet, notwithstanding these commonalities, there have been only limited efforts to understand how we can learn from one another on public policy. We can and should do a better job sharing experiences and ideas.

A new essay collection published by the Macdonald-Laurier Institute, a Canadian-based think-tank, in conjunction with the Centre for Policy Studies and other think-tank contributors across the Anglosphere, tries to do just that with regards to fiscal policy.

The project involved contributors from various think-tank scholars and forewords from leading fiscal reformers such as former Australian treasurer Pete Costello, former Canadian finance minister Paul Martin, New Zealand finance minister Ruth Richardson, and British Conservative MP (and CPS Deputy Chairman) Graham Brady. The series, entitled The Case for Fiscal Reform: Lessons from the Anglosphere, amounts to a fiscal playbook for US policymakers based on the experiences with fiscal reform in Australia, Canada, New Zealand, and the United Kingdom.

The United States can certainly use the help. Its fiscal woes are well known. Federal debt is now nearly $15 trillion. It has reached 77 per cent of GDP and is set to climb to 150 per cent by about mid-century. There are few credible voices who dispute that this is sustainable.

But while there’s general agreement on the scope and magnitude of the problem, there’s less consensus on the right solution. A debate about the proper composition of fiscal reform and its potential economic and social effects remains unresolved. What’s the right mix between tax changes and spending cuts? How will it affect low-income Americans? What will it do to the economy? Competing views about “fiscal drag” and “expansionary austerity” have led to a fiscal stalemate.

US policymakers can look to the Anglosphere – Australia, Canada, New Zealand, and the United Kingdom – for answers to some of the questions. The fiscal reform experiences in these countries can provide some background and context to the US policy debate, and may ultimately help to break the impasse in favour of much-needed action.

Each of the Anglosphere countries has found itself in similar fiscal circumstances as the United States at different times in recent decades. Each was confronted with a fiscal crisis due to overspending and high debt levels. Canada was called “an honorary member of the third world.” An incoming British Cabinet minister was warned by his predecessor that there was “no money.” Long-term fiscal profligacy eventually caught up to them.

Each country thus undertook ambitious fiscal reforms to control spending, cut budget deficits, and reduce or stabilise government debt. Not every policy choice was perfect and there’s since been some backsliding particularly in Canada and the United Kingdom. But it’s difficult to contend with the outcomes. The naysayers (including IMF managing director Christine Lagarde in the case of the post-2010 British reforms) were proven wrong. Fiscal reforms in these Anglosphere countries produced considerable “fiscal dividends”, including positive economic growth and job creation. The main lesson is that well-designed fiscal reform can be part of a pro-growth, pro-opportunity agenda.

More specifically, we identified five common lessons from across these Anglosphere experiences:

Transparency is essential to secure public support and build a coalition in favour of fiscal reform. Reformers must be clear about the scope of the problem and build broad-based support for solutions. This cannot be a party-political issue.

Clear fiscal rules, targets, and criteria can help to strengthen political will and demonstrate progress to the public. Bogus accounting or arithmetic complexity reduces the probability that fiscal reforms will ultimately be successful.

Focus on reforming government spending rather than simply resorting to higher taxes. Raising taxes will only dampen economic growth and exacerbate the government’s fiscal challenges at the precise moment that dynamism and growth are needed.

Fiscal reform must involve a clear-eyed review of all government spending. The process must be equitable and fair. No sectors or areas should be protected. That means no ring-fencing.

Fiscal reform ought to be part of a broader agenda to promote economic dynamism and opportunity.

Concerns about US fiscal challenges seem to have fallen down the political priority list in recent years. The ongoing budget deficit and rising federal debt were, by and large, absent from the 2016 presidential debate and have been neglected ever since. But inaction isn’t a long-term option. The arithmetic is inexorable. It will eventually catch up to them just as did in Australia, Canada, New Zealand, and the United Kingdom.

These Anglosphere experiences with fiscal reform show that the right steps can avert a budgetary crisis and enable the conditions for economic growth and job creation. It’s up to US policymakers to learn these lessons. And just as important for policymakers in Canada and the United Kingdom not to forget them.

Sean Speer is a Munk Senior Fellow at the Macdonald-Laurier Institute in Canada. Daniel Mahoney is Deputy Director and Head of Economic Research at the Centre for Policy Studies. Both are contributors to MLI’s essay compilation, 'The Case for Fiscal Reform: Lessons from the Anglosphere'.