Canada's Plot to Become the United States

Alex Tabarrok posts a graph that compares US and Canadian government spending as a percentage of GDP, and finds that the two are at almost the same level: a little under 40% of GDP. The "US is becoming Canada," warns Eric Crampton. "Damn that hurts," mourns Alex. And indeed it does.

But if you look at the graph, it's pretty clear the big shift has less to do with any drastic change in American spending patterns, and far more to do with a drastic change in Canadian habits:

And if you go back to the original source of the graph -- Canada's National Post, a Conrad Black newspaper -- it seems that some Canadians view this as a welcome change in Canadian policy that will result in Canada crushing the hapless US through competitive tax advantages:

We peak in the early 1990s with public spending at Scandinavian -- and scandalous! -- levels of over 50% of GDP.

But then our spending starts declining (as a share of GDP, though not in absolute terms). Some of the improvement is cyclical, reflecting recovery from the early-1990s recession. But the decline continues on into good economic times, to the extent that now public spending is virtually the same share of the two countries' GDPs.

Just how far apart the two shares remain depends on precisely which data series you use to track them. Different definitions of "public spending" give slightly different results. But the general message holds no matter which series you use: Expenditure-wise, we're now more like the Americans than we have been in decades.

[...] It's not inconceivable that in five years' time, we'll be spending less through our public sector than the Americans are through theirs. And if both countries get back to balanced budgets, that means the tax drag will be less here than it is there.

Getting your mind around the possibility that we will be the lower-tax jurisdiction in North America takes some doing, but in fact that was the case during the 1950s, some of the best economic years in our history.

[...] The tax rate isn't the only reason companies decide to set up in a jurisdiction, or why companies already here decide to invest more, but it's surely one reason. If we can have a lower tax rate than the Americans and still provide the public services that suit our own Canadian needs, that's going to give Canada an important economic advantage.