The High Price of Big Spenders

July 19, 2013

EU Flag - TattersIt all seems rather hopeless for Europe’s debtor-nations. Four of them — Portugal, Ireland, Spain and Greece — have needed bailouts since the beginning of the global debt crisis. The underlying cause of this is too much government spending, financed with too much debt.


History has shown us that these governments can transform themselves, because it has been done before. Over the last two decades Germany, Israel and Canada have overcome debt and unemployment problems by departing from a culture of big government, towards one of free enterprise.


In Germany only 25 years ago, a fifth of the population lived under communism. In his first term in office, Chancellor Gerhard Schroeder’s socialist policies made Germany the sick man of Europe. After four years, the country suffered a 10% unemployment rate and debt levels that exceeded the European Union’s allowable limits.


In 2003, Schroeder underwent a transformation and introduced policies which cut welfare programs, simplified labour rules and lowered taxes for businesses and workers. Since then, unemployment has fallen by almost half to 5.3%. This is more than seven points below the Euro-zone average. Unlike its neighbours, the German government is expected to balance its budget by next year.


Israel has also revamped its welfare state. In 2003, then-Finance Minister Benjamin Netanyahu recognized the need to change from the socialist policies of the day.  According to the authors of Start-Up Nation: The Story of Israel’s Economic Miracle, “Netanyahu cut tax rates, transfer payments, public employee wages and 4,000 government jobs. He also privatized major symbols of the remaining government influence on the economy — such as the national airline, El Al, and the national telecommunications company, Bezeq — and instituted financial-sector reforms.”


The result is that Israel now enjoys one of the most energetic and durable economies, despite having scarce natural resources and no friendly trading partners in the region. The jobless rate has fallen by almost half since the reforms, despite today’s global economic slump.


What worked for Israel is working for Canada. Approximately 20 years ago, Canada signed the North American Free Trade Agreement (NAFTA), which expanded one of the most successful trade relationships ever. Since that time, government spending as a share of the economy has plummeted from 50% to 41%, allowing for lower business and personal taxes. Since 1985, the federal government has privatized 30 state-owned entities, totalling $12 billion. These combined factors led the Heritage Foundation to report that Canada has the 6th freest economy in the world, ahead of the United States at 10th.


Such economic freedom has given Canada the lowest net debt-to-GDP ratio in the G8, a record number of people employed and a one-third drop in the jobless rate since the reforms began two decades ago. In fact, the story is the same in all three jurisdictions: less debt and more jobs than their competitors.


If the four bail-out nations had taken the same steps 20 years ago, we would not have a debt crisis in Europe today. Fortunately, it is never too late to do the right thing.

Pierre Poilievre MP


A version of this article originally appeared in the National Post.