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Federal Budgetary Comparisons: Canada and the United States

Summary:
It is federal government budget season in both Canada and the United States and I thought it might be useful to provide a few visual comparisons on federal government finance for the two countries. While the expenditure responsibilities and composition of the two federal governments as well as the relationships and responsibilities with lower tier governments differ – in particular, the US federal government spends a larger direct share of its spending on health via Medicare and Medicaid and of course more on defense - the longer-term trends over time are illuminating. The data for Canada used here is from the Federal Fiscal Reference Tables, Statistics Canada and Historical Statistics of Canada while the US data comes from Federal Reserve Economic Data – that is to say the Federal Reserve Bank of St. Louis. Figure 1 plots the federal government spending to GDP ratio for the two countries form 1960 to 2016.   Relative to GDP, the US federal government has always been larger than the Canadian federal government though the gap narrowed considerably during the late 1980s/early 1990s. This was primarily a result of Canada's federal fiscal crisis of the early 1990s – as Figure 2 shows, debt interest as a share of federal spending was substantially higher in Canada than the United States in the 1980s and 1990s.

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It is federal government budget season in both Canada and the United States and I thought it might be useful to provide a few visual comparisons on federal government finance for the two countries. While the expenditure responsibilities and composition of the two federal governments as well as the relationships and responsibilities with lower tier governments differ – in particular, the US federal government spends a larger direct share of its spending on health via Medicare and Medicaid and of course more on defense - the longer-term trends over time are illuminating.

The data for Canada used here is from the Federal Fiscal Reference Tables, Statistics Canada and Historical Statistics of Canada while the US data comes from Federal Reserve Economic Data – that is to say the Federal Reserve Bank of St. Louis. Figure 1 plots the federal government spending to GDP ratio for the two countries form 1960 to 2016.   Relative to GDP, the US federal government has always been larger than the Canadian federal government though the gap narrowed considerably during the late 1980s/early 1990s. This was primarily a result of Canada's federal fiscal crisis of the early 1990s – as Figure 2 shows, debt interest as a share of federal spending was substantially higher in Canada than the United States in the 1980s and 1990s. At present, the federal government expenditure share of GDP is about 15 percent in Canada and 23 percent in the United States.

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While defense spending has always been a much larger share of US federal spending than Canada, its share of the US federal budget has dropped from 60 percent in the early 1960s to about 18 percent at present. Canada in the early 1960s was spending nearly 25 percent of the federal budget on defense and it is now down to about 10 percent. The US federal government expenditure shift away from defense spending is particularly interesting. Figure 3 plots non-defense program spending as a share of both US and Canadian federal government budgets from 1960. Once defense and debt interest costs are taken into account, Canada has generally always spent between 60 and 80 percent of its budget on other programs. The United States, on the other hand has seen a steady rise in its non-defense program spending as a share of total federal spending rise steadily from approximately 25 percent in 1960 to about 70 percent today.

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Both governments have seen an expansion of transfer payments whether to individuals or other governments. Indeed, the United States federal government seems to have become more similar to Canada's with its orientation towards programs rather than security.  Both governments have also acquired substantial amounts of federal government debt but the US has recently been outperforming Canada in this regard. As Figure 4 illustrates, the federal government deficit to GDP ratios move very much in tandem over time but since 2000 the US has had substantially larger federal government deficit to GDP ratios than Canada. A factor is increased defense spending after 9/11 and the greater severity of the 2007-2009 recession on the US. Both federal governments appear projected to continue deficit financing over the next few years based on respective economic updates and projections from Finance Canada and the Congressional Budget Office.

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