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Canada’s Concern about the U.S. Fiscal Cliff

December 14, 2012

by John Parisella

For many of us north of the border, we are watching the showdown emerging around the U.S. fiscal cliff discussions. Despite President Barack Obama’s rather convincing victory, it is clear that the divisions remain—and the role of government is central to the discussion.  The 2011 debt ceiling stalemate resulted in a process where gridlock was essentially institutionalized with December 31, 2012 as the ultimate date to find a negotiated settlement or else. It is a collective “jump off the cliff.’.

Influential voices such as former Secretary of State Madeleine Albright and International Monetary Fund President Christine Lagarde are warning about the decreasing role of the U.S. in global economic matters should it fail to get its debt and deficit problems under control. The increasing possibility that a deal will not be reached in time for automatic tax increases and spending cuts to kick in and threaten a second recession in four years has to preoccupy world economies.

The European Union is in recession, emerging markets are less robust and the U.S. economy has had a sluggish recovery since the middle of 2009.  A U.S. recession could have catastrophic results, especially north of the border. In recent days, Bank of Canada Governor Mark Carney sent some ominous signals about the risks associated with failure to reach a deal on the fiscal cliff. We in Canada may have done better coming out of the Great Recession, but there is evidence that another U.S. slowdown will have a serious impact on a range of our exports and overall consumption leading possibly to a Canadian recession as well.

While Canada’s economic future is often dependent on how the U.S. economy fares, we did get some things right that could serve as a guide to U.S. policymakers. The balanced approach regarding revenue and spending cuts that Obama so often advances has been on our radar with successive governments—both Liberal and Conservative—since the mid-1990s. Deficit reduction, debt control, revisiting entitlement programs, modest stimulus programs, tax reductions, free-trade agreements, and reducing the size of government has been very much a part of Canada’s public policy agenda in the last 20 years. Fortunately, Republicans and Democrats have been sending some more encouraging signals in recent days.

It was Winston Churchill who once said that America will try all solutions until they find the right one. It is clear Obama has a mandate to tax the top two percent, whether he does it by raising tax rates or closing tax loopholes. But there is an indisputable reality: tax revenue will not be enough. Some tough decisions about spending cuts including the defense budget, Medicare, Medicaid, and possibly social security will have to be part of the eventual “grand bargain.”

To do this, it will take leadership and political courage on all sides of the partisan divide.  It will also have to involve vision and audacity. Clearly, the eyes of the world are directed on the U.S. political class, and especially on President Obama. Having been decisively re-elected last month, it has been said that Obama has a rendezvous with history as he begins his final term. All are waiting to see how he pulls it off, including Canada.

Tags: United States, Fiscal Cliff, Canada


 
 

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