How Other Countries Have Gotten Their Debts under Control

A new post from Alex Durante at the Tax Foundation summarizes how other countries have solved major fiscal problems. He writes, “Successful fiscal reforms largely rely on spending reductions and modestly rely on certain types of tax increases, while less successful reforms largely rely on income tax hikes.”

Some countries have tried both approaches. For example, Ireland in the early 1980s had double-digit inflation and a budget deficit in excess of 15 percent of GDP. (In 2022, the U.S. deficit-to-GDP ratio was 5.5 percent.) After trying a mix of tax increases and spending reductions, “Ireland then switched to primarily reducing spending, including reductions in staffing and wages for government employees, a hiring freeze, and cuts to subsidies and social welfare transfers,” Durante writes. In 1994, Ireland added discretionary-spending controls. The debt-to-GDP ratio declined from 85 percent in 1982 to below 40 percent in 2000.

Sweden is often seen as a primary example of a social-democratic, big-government country, and it used to be one, but reforms since the 1990s have gotten spending on a much better path. Sweden successfully reformed its social-security program in 1994, and the country’s retirement system performs better than the United States’ while also being financially sustainable. As part of the transition away from full-blown social democracy, government spending fell by 16 percent of GDP between 1993 and 2000. “The cuts focused on pensions, government employment, and transfers,” Durante writes. “For example, transfers and subsidies in particular declined as a percentage of GDP from 27 percent to 19 percent over a seven-year period.”

In the early 1990s, Canada saw deficits above 9 percent of GDP and debt over 100 percent of GDP. That’s roughly where the U.S. will be this year. “Cuts to government employment compensation and staffing were responsible for nearly half of the reform,” Durante writes. While there’s plenty of such cutting to do in the U.S., unfortunately that won’t get us quite as far in solving the overall problem. “The other half included cuts to transfers, specifically converting several of its programs to a system of ‘block grants’ to provinces, and the partial privatization of state-owned enterprises, such as its air traffic control system.” Block grants to states would be a sensible part of any major spending reform in the U.S., and they’d also help to align government better with the Constitution by undoing some of the federal government’s past power grabs. “Canada also enacted spending caps through its legislature to ensure spending growth would be restrained throughout the decade,” Durante writes. Such caps would be helpful so long as the legislature upholds them in practice and doesn’t waive them, as Congress has done with spending caps in the past.

“In all, the experience with successful fiscal consolidations suggests they should be gradual and spending-focused, with careful consideration of the growth effects of selected policies,” Durante writes. Sadly, the evidence he surveys only highlights how far away Congress currently is from having that kind of a discussion.