In the early 1990s, Canada was facing a debt-to-GDP ratio of nearly 80 percent and federal spending had reached 23 percent of GDP. Our debt-to-GDP ratio has already surpassed 100 percent and federal spending has ballooned from a historic rate of 18 percent to around 25 percent today.
Canada was forced to make changes because rising interest rates caused their debt service to consume one-third of all federal revenue. We currently pay only about 6 percent of our federal budget to service our debt, as a direct result of the Fed buying over 3/4 of all newly issued debt and doing so at artificially low interest rates.
In fact, Bill Clinton recently warned that if interest rates were the same today as when he was president, debt payments would increase from $250 billion to $650 billion per year. He acknowledged that as the economy starts to grow, “interest rates will go through the roof, the cost of financing the deficit will be staggering . . .”
Estimates are that within four years and a return to the historic norm of 4.75 percent, interest will cost us as much as all discretionary spending, defense and non-defense combined. We have the advantage of being the world’s reserve currency and subsequently, the luxury of more time to either fix the problem or make it significantly worse.
Canada solved its fiscal problems by drastic reductions in government spending and personal and corporate tax cuts. The Liberal party, in power at the time, slashed the budget by approximately 10 percent over two years. According to Paul Martin, Canada’s finance minister during this time, it was not ideology that led the government to make these dramatic cuts; rather it was “arithmetic,” or, in other words, reality. Even health care spending was reduced and money was given as block grants to the provinces to limit federal risk.