2 March 2018

What the US should learn from elsewhere about tackling its debt

By Sean Speer

The prevailing narrative about Washington is about dysfunction and disorder. Google “Washington is broken” or “Washington can’t compromise.” The list of search results is seemingly infinite.

It’s not totally unfounded. Leading congressional scholars and thinkers such as those involved in R Street Institute’s governance project have pointed to various problems with the current functioning of US politics and governance and put forward thoughtful reforms to fix them.

But while there are institutional and cultural changes that need to happen in Congress, the principal problem in Washington isn’t dissension but rather consensus. The conventional focus on political disunity obscures the bipartisan unity in favour of more spending, higher deficits, and greater debt accumulation. American taxpayers could use some political divergence in favour of budgetary reform and long-term fiscal sustainability.

This month’s budget deal between Republicans and Democrats in the Senate increases domestic and military spending by roughly $300 billion over the next years. When added to last year’s tax cut law, the budgetary effects of congressional action will lead to $1 trillion deficits by 2019 and thereafter. And this doesn’t even include President Trump’s much-hyped infrastructure spending.

It’s a budget-breaking series of fiscal choices that exemplifies how a pro-deficit bias has consumed Washington. A growing economy and Republican majorities (including a House led by long-time fiscal hawk Paul Ryan) were still not enough to make any fiscal progress. It’s a troubling realisation for many who hoped for less spending and lower deficits.

Instead the US national debt, which now exceeds $20 trillion, will climb to historic levels. Recent estimates suggest it will hit 85 per cent of GDP by 2021. It will exceed 100 per cent in the next 25 years. A recent Goldman Sachs analysis calls it “uncharted territory.”

This perspective neglects the experiences of other English-speaking countries – namely Australia, Canada, New Zealand, and the United Kingdom – that have had to deal with similar fiscal challenges over the past quarter century. US lawmakers can and should learn lessons from these Anglosphere experiences with fiscal reform.

These countries fell into a similar pattern of protracted deficit spending. Different political parties came and went. It didn’t matter. The fiscal outcomes were always the same. A political consensus in favour of more spending and higher deficits was firmly entrenched. Soon the costs of this multi-partisan profligacy became apparent. Their public finances were unsustainable.

Canada was dubbed “an honorary member of the Third World” by Wall Street Journal. An outgoing British Cabinet minister left a note for his incoming successor that simply read “I’m afraid that there’s no money.” Circumstances in Australia and New Zealand were equally bleak.

How did these Anglosphere countries retreat from this unchartered territory and back to more stable fiscal terrain?

The political centre gradually shifted on these issues. A series of factors contributed, including considerable academic and think-tank scholarship, a general rise in market-oriented thinking, growing market pressure in the form of higher borrowing costs, and the emergence of new political voices who argued against the arithmetic and political reasoning of Keynesianism run amok.

But new political configurations that challenged the old, pro-spending consensus were key. Canada’s Liberal government was eventually influenced by the fiscal critiques of the upstart Reform Party (including future Canadian Prime Minister Stephen Harper). The British Conservatives entered a formal political coalition with the Liberal Democrats. Similar cross-partisan cooperation emerged in Australia and New Zealand where the centre-Left and centre-Right were ultimately involved in budgetary reform.

A new, emergent political consensus in favour of fiscal reform was key to navigating the politics of spending cuts and deficit reduction. The lesson from the Anglosphere is that this can’t be a party-line issue.

But a degree of political convergence is a necessary yet insufficient condition for fiscal reform. It also requires a credible and transparent process. This is essential to build public confidence and to strength congressional or parliamentary will – particularly in the face of invariable political blowback and special interest pleading.

The Canadian experience is notable in this regard. The government established a six-point test to measure and assess different programmes and services. The tests were (1) serving the public interest, (2) necessity of government involvement, (3) appropriate federal role, (4) scope for public-private partnerships, (5) scope for increased efficiency, and (6) affordability. The process was transparent and evidence-based. The onus was then on special interest critics to defend spending that failed these tests or to argue how the results were wrong. The outcome was a nearly 10-per cent cut in federal spending over three years. The governing Liberal Party was subsequently re-elected.

Congress should adopt a similar model. All government spending should be subjected to such tests. No carve outs or “ring-fencing.” Compromises may be required but should be done based on publicly-available analysis and transparent trade-offs. The goal is to build a sensible set of fiscal reforms that can survive the political process. It’s needed now more than ever.

Breaking the current pro-deficit consensus in Washington won’t be easy but it’s essential for long-term fiscal sustainability. It must start with a political divergence with the fiscal status quo and the cultivation of a new political consensus in favour of fiscal reform and sound public finances.

Former Indiana governor Mitch Daniels spoke of such a new political configuration in his 2011 speech to the Conservative Political Action Conference. He warned that tackling the “red menace” of deficits and debt would require a pro-reform coalition. He wasn’t wrong. The Anglosphere experience can provide some useful lessons in this regard. It’s important that Washington learns them.

Sean Speer is a Munk Senior Fellow at the Macdonald-Laurier Institute and editor of The Case for Fiscal Reform: Lessons from the Anglosphere