WHY CANADA IS BEATING AMERICA / THE WALL STREET JOURNAL OP EDITORIAL ( VERY HIGHLY RECOMMENDED READING )

OPINION

JULY 31, 2011, 6:50 P.M. ET.

Why Canada Is Beating America


It shrank government, and now unemployment and debt are declining.
By JASON CLEMENS

While the U.S. remains mired in debt and slogs through a subpar economic recovery, Canada is moving ahead steadily. Its unemployment rate peaked at a little over 8.5% and is now 7.4%, and there were no bank bailouts. Real GDP growth is expected to be roughly 3% this year.


Now with the first majority government since 2004, and the first Conservative majority since 1993, the country has an opportunity to vault forward. The Conservatives led by Prime Minister Stephen Harper have a chance to build on the reforms begun under previous Liberal governments that Americans can only look at with envy.


Canada's government, for example, has grown smaller over the last 15 years. Total government spending as a share of the economy peaked at a little over 53% in 1993. Through a combination of spending cuts in the 1990s and spending restraint during the 2000s, it declined to a little under 40% of GDP by 2008. (It's currently about 44% due to the recession.)


Reductions in government spending allowed for balanced budgets and the retiring of debt. Federal debt as a share of the Canadian economy was almost halved from nearly 80% to a little over 40% over the same period.


On the federal level, capital gains taxes in Canada were reduced twice and currently stand at 14.5%. A series of cuts to the corporate income tax beginning in 2001 have seen the rate slashed to 15% from 28%. Many provinces followed suit by reducing both corporate and personal income tax rates.


But the Conservative government faces two challenges: health reform and taxes.


The unavoidable challenge is the country's health-care system. Negotiations to renew federal transfers to the provinces in support of health care begin later this fall.


Canada devotes a relatively high share of its economy to health care without enjoying commensurate outcomes. Of the 28 countries in the Organization for Economic Cooperation and Development (OECD) that have universal access, Canada has the sixth-highest rate of health spending as a share of its economy.


Canadian health care is unique among the OECD countries with universal access in that Canadians alone depend almost exclusively on government for medically-necessary health care. Simply put, health care is dominated by the government in one form or another. Canada prohibits both copayments and private funding for publicly-insured services. Hospitals are for practical purposes owned and operated by government, and over 98% of physician income is from government.


But Canadians' access to care is poor, despite high spending. The country ranks 20th of 22 OECD countries for access to physicians. Canada's national statistical agency recently reported that 6.6% of Canadians (aged 12 or older) indicated being without a doctor and unable to find one. Canada also ranks poorly on access to technology: 17th for CT scanners and MRIs.


Waiting times for treatment continue to worsen. A longstanding survey by the free-market Fraser Institute recently found that the median wait time between general practitioner and treatment had increased to 18.2 weeks (2010) from 9.3 weeks in 1993 when the survey started.


While the United States moves towards greater centralization of health-care regulation, Canada's Conservatives have an opportunity to give the provincial governments more leeway in delivering and financing health care. Allowing the provinces to become laboratories for different methods of health-care delivery and financing while protecting universal access holds the greatest chance for improving health care and controlling costs.


Uncompetitive tax rates, particularly compared to the U.S., are the country's other major challenge. Canada's Conservative Finance Minister Jim Flaherty has consistently indicated that lowering personal taxes is a priority. In a recent interview he stated that Canada "should be moving toward a flatter personal income tax system."


Canada's personal income tax rates are relatively high and kick in at comparatively low levels of income. For example, Canada's top federal marginal personal income tax rate (29%) applies to income over $128,800 (in Canadian dollars, or U.S. $135,038 as of July 29). Provincial taxes, which are generally higher than in U.S. states, are added on top of the federal rates. The top federal tax rate in the U.S. is 35%—but it applies to income over U.S. $379,150.


The Conservatives have committed to tax relief once the budget is balanced, which is expected toward the end of their current term. To implement meaningful income tax cuts, the Conservative government will also need to be more proactive with spending reductions. As demonstrated in the 1990s by their Liberal Party predecessors, spending reductions now will result in a balanced budget sooner and an opportunity for large-scale tax relief.


Winning a Conservative majority in Canada was no small feat. The question remains what the Conservatives will do with that majority.


Mr. Clemens is the director of research at the Canadian Macdonald-Laurier Institute and co-author of the "Canadian Century" (Key Porter, 2010).
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