- The Washington Times - Thursday, December 1, 2011

Fitch Ratings thinks the United States is still a AAA country, but its optimism disappeared this week. The credit evaluator downgraded the outlook for the U.S. economy to negative despite the recent bump in consumer spending and a slight improvement in employment numbers for November. It’s hard to look at the inability of Congress to come up with credible spending cuts without a feeling of impending doom.

Gloom has settled upon Europe, where the debt crisis continues to spread and the Organization for Economic Cooperation and Development is predicting a global recession. As it is, the OECD has slashed the growth forecast for its 34 members to 1.6 percent, down from 2.3 percent just six months ago. The forecast for troubled Europe dropped from 2 percent to a barely perceptible 0.2 percent.

That’s bad news for us because the European Union is among our largest trading partners. Worse, the politicians on our shores appear to be duplicating the Old World’s mistakes by avoiding the hard choices needed to address the debt situation. Europe’s parliamentarians continue to push aside the bitter medicine of spending restraint, and each day the price for doing so escalates.

Contrast this to the situation in Canada - one of the few OECD countries that has weathered the current economic slowdown. Because Canada learned its lesson, the nation is creating jobs today. The Canadian situation was bleak in 1994, when the nation endured a fiscal and debt crisis with the humiliation of a credit downgrade. Canada suffered the uncertainty of not knowing whether a bond auction aimed at funding its deficit would attract enough bids. It did, but only at the last minute.

In 1994, Canada was running a fiscal deficit of 5.6 percent (well below the peak of 8 percent in 1983 and 1984, but still unsustainable) with a debt-to-gross-domestic-product (GDP) ratio of about 67 percent. That’s small by today’s diminished standards, but back then it earned the Great White North a downgrade to AA status. Then-Prime Minister Jean Chretien faced reality and undertook the deep spending cuts that were necessary. Initially, the cuts came with modest tax increases, but later policy corrected the mistake by switching to tax reform, which included sharp reductions in corporate tax rates. Consequently, Canada’s debt burden hit a low of 29 percent of GDP and remains an extremely manageable 33 percent even in the wake of the 2009 recession. The Canadian economy outperformed the U.S. economy between 1997 and 2007.

Today, with the federal debt already past $15 trillion, we face a hard choice. We can take the Canadian route, or we can go down the path of Greece, Italy and the other European countries. Our fiscal deficit is around 9 percent, and our debt-to-GDP ratio is about 62 percent. Within the decade, it will hit the danger level of 90 percent. We’re headed toward the cliff. We shouldn’t wait until we’re over the edge to adjust our course.

We still have time to emulate our northern neighbor, but that means every single thing must be on the table when it comes to spending cuts. That is the only way to fiscal safety.