Fiscal Reform Lessons From the Anglosphere
Congress is deeply entrenched in an effort to reform the federal tax code. Central to this effort is a desire to lower the U.S. corporate tax rate from 35 percent to 20 percent — a level on par with the rest of the developed world. Policymakers are keenly aware of the competitive advantages this change could bring based on similar rate changes across Europe and around the globe.
But the lesson of corporate tax reform that the U.S. has learned from its peers may be an exception rather than the rule. The U.S. sometimes tends toward insularity and a false assumption that international peers have few worthwhile lessons to share. This is a mistake. America’s exceptionalism shouldn’t preclude it from drawing on experiences of other countries, particularly those with similar ideas, institutions, and values. Fiscal policy is a case in point.
In the U.S., the fiscal year 2016 budget deficit was nearly $600 billion, and federal debt now stands at $14.8 trillion or 77 percent of GDP. The Office of Management and Budget anticipates the federal debt will reach 111 percent of GDP by 2042. The Congressional Budget Office predicts a debt to GDP ratio of 150 percent by 2047. Differences notwithstanding, it’s clear that the U.S. has a fiscal problem and it’s forecasted to only get worse.
Yet legislative paralysis — partly driven by ongoing debates about the right composition of fiscal reform and its potential economic and social effects — has contributed to a political stalemate and a rising debt.
As it happens, our friends in the Anglosphere — Australia, Canada, New Zealand, and the United Kingdom — have all faced similar fiscal circumstances and their experiences hold crucial lessons for U.S. policymakers. These countries have shown that the right policy choices at the right time can avert budgetary crises and enable economic growth, investment, and job creation.
The Anglosphere countries have all been confronted with fiscal crises due to overspending, high debt levels, and a political tendency to put off reform. The problems eventually caught up to them. Canada was accused of becoming “an honorary member of the Third World.” An incoming British Cabinet minister was warned by his predecessor in 2010 that there was simply “no money.” Circumstances in Australia and New Zealand were equally bleak.
Each country thus subsequently undertook ambitious fiscal reform programs to control spending, cut budget deficits, and reduce or stabilize government debt. The circumstances were slightly different in each country: some reforms were led by center-left governments and others by conservatives; some involved broader market reforms and others were more limited to public finances.
But there were key similarities, too. In each case, fiscal reforms mostly focused on government spending rather tax hikes. The economic and social outcomes were generally positive. Anti-austerity warnings failed to materialize. The “fiscal dividend” resulting from greater budgetary discipline enabled a raft of positive economic reforms, including lowering personal and corporate tax rates. The main takeaway is that well-designed fiscal reform can be part of a pro-growth, pro-opportunity agenda.
More specifically, the experience of these Anglosphere countries offers U.S. policymakers five common lessons:
1. Transparency is essential to secure public support for fiscal reform. Reformers must be clear about the scope of the problem and build broad-based support for proportionate solutions. Fiscal reform cannot be a single-party issue.
2. Clear fiscal rules, targets, and criteria can strengthen political will and demonstrate progress to the public. Bogus accounting or arithmetic complexity reduces the chance that reforms will be successful.
3. Focus on reforming government spending rather than resorting to higher taxes. Raising taxes will only dampen economic growth and exacerbate the government’s fiscal challenges at the precise moment that dynamism and growth are needed.
4. Fiscal reform must involve a clear-eyed review of all government spending. That means no ring-fencing of the defense budget or carve-outs for favored social services.
5. Fiscal reform ought to be part of a broader agenda focused on reviving American dynamism and opportunity. Eliminating the budget deficit and stabilizing the debt are necessary but not sufficient steps toward a stronger U.S. economy.
These lessons are described in greater detail in a new essay compilation, “The Case for Fiscal Reform: Lessons from the Anglosphere,” published by the Macdonald-Laurier Institute, a Canadian think tank. The project involved contributors from think tanks across the Anglosphere and forewords from leading fiscal reformers, including former Australian treasurer Pete Costello, former Canadian finance minister Paul Martin, New Zealand finance minister Ruth Richardson, and British Conservative member of Parliament Graham Brady. The series amounts to a fiscal playbook for would-be reformers in Congress.
We hope that U.S. policymakers learn these lessons before it’s too late.
Sean Speer is a Munk Senior Fellow at the Macdonald-Laurier Institute in Canada. Alex Brill is a Resident Fellow at the American Enterprise Institute in Washington, D.C. Both are contributors to MLI’s essay compilation, “The Case for Fiscal Reform: Lessons from the Anglosphere.”