We are all fans of Canada now. The outbreak of cross party support for the appointment of Dr Carney to the Bank of England was based on enthusiasm for the way Canada got through the last boom and bust crisis in much better shape than the UK. There were no failures of major banks, a smaller drop in output and a much quicker recovery. So we need to ask what were the magic ingredients behind this success?
It was not just better Central banking, though that did help. The Central Bank of Canada did make enough liquidity available to banks at a time when the Bank of England was preaching moral hazard and watching banks go bust as a result. Today Canada has an official interest rate of 1%, and an inflation rate below the 2% target. It was also the state of the Canadian public accounts. that helped Canada through the Credit Crunch.
Canada had followed a path of spending and borrowing too much, leading to an earlier crisis. A fundamental review of public spending was undertaken and substantial cuts pushed through. Following this adjustment, the economy started to perform better. The UK Conservatives studied this in oppposition, but have not been able to do something similar in a Coalition government.
In 2011 the figures show that Canada’s public spending as a percentage of GDP was 39.7%, compared to the UK’s 47.3%. Keeping public spending under better control before and during the crisis clearly limited the damage from international events and allowed a swifter recovery.
In 2011 tax revenues amounted to 32.2% of GDP, compared to 38.9% in the UK. Canada’s economy benefitted from lower rates of tax and less tax being raised by fewer taxes. The UK’s level of taxation was 6.7% of GDP higher. Canada’s top rate of federal income tas was just 29%, compared to the UK’s 50%. It comes in when incomes rise above $132,000. Even adding in state income taxes, Canada’s income tax levels provide a top rate of around 40%, not 50%.
Canada has been running a smaller deficit and building up debt less quickly.
The Canadian economy was assisted by sensible Central banking across the crisis,, but performed better for a range of reasons. Lower tax rates, better value for money public spending, and better control of state debt levels were important factors in the success. Can Dr Carney help persuade more UK politicians of the wisdom of such a policy package?
Canada is now generating 7% more output than before the crisis, whilst the UK, Japan and the Euro area are still below 2007 levels. The Canadian economy has grown in every quarter save one since 2010.