Federal Budgetary Comparisons: Canada and the United States

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.

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.

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.

 

Update March 6, 2017

Well, in response to a request here are figures 2 and 3 redone but with the spending as a share of GDP.  I think 3a is particularly interesting.  Federal government non-defense program spending as a share of GDP in the United States is now greater than in Canada. 

 

Comments

[Majromax]

Does the Canadian side of things include CPP revenues and expenditures, and similarly does the US side include social security?

I'd assume that CPP is excluded from the deficit figures, as otherwise the notional CPP surplus for 2016 should have pushed Canada into a very small surplus for that fiscal year.

It would be interesting to see the differing impacts of the demographic bubble between the US and Canada as Canada undertook substantial CPP reform in the 90s, more aggressively than the US reformed Social Security.

[Livio Di Matteo]

@Majromax: CPP is not in Canadian federal spending but social security is in US federal spending. However the Canadian spending includes Old Age Security.

[Ram Acharya]

As the provincial and state level responsibilities may not be the same, it would have been a more useful to have another charts that compare total government (national plus provincial, state) expenditure in GDP.

[Two Hats]

To aid comparisons, can you add [item] as % of GDP series to figures 2 & 3?

[Livio Di Matteo]

@Two Hats:good idea. Will update the post in the next day or so. Livio.

[rsj]

Hi Livio,

I'm having a difficult time reconciling your US interest chart with OMB data:

https://fred.stlouisfed.org/series/FYOIGDA188S

...which seems to have interest payments as a % of GDP around 1.3%, whereas you have it as 2.5% -- are you perchance plotting debt service rather than interest expense? Principle repayment is not an interest expense.

Also, for your "Federal Government Spending", it's not clear what you mean by "spending".

Federal Net Outlays is the standard measure here:

https://fred.stlouisfed.org/series/FYONGDA188S

..which also differs from your chart by about 2%. Are you perchance measuring gross outlays? Again, that's a problematic measure.

More importantly, total outlays isn't going to tell you much of anything, since what you care about is consumption and not capital expenditures. E.g. take a family that was renting in year 1 but in year 2 buys a house. Just looking at the outlays makes it look like the family spent a lot in year 2, but really it just expanded its balance sheet. The actual spending of the family changes by the difference between the interest payment on the house and an equivalent rent, together with re-valuation of the property. But if you bundle capital spending (e.g. on structures) together with things like employee salaries all into one number, you aren't going to get much information, nor is this a useful comparison because if government A prefers to lease it's structures but government B buys them outright, then B will look like it's spending a lot more in some periods and lot less in others, even though both governments are spending exactly the same amount. Similarly, deficit to GDP doesn't mean anything if you are treating capital investments the same as consumption. Also, your graph is a bit different from the one in FRED:

https://fred.stlouisfed.org/series/FYONGDA188S

which has the US deficit to GDP as 3.1% in 2016, but it looks like 4% in your graph.

[Livio Di Matteo]

@rsj: Thanks for the comments. I am not as familiar with US data sources as I am with Canadian and it was a bit of a challenge given the wealth of data available. For interest payments on the US federal debt I used - A091RC1Q027SBEA - and for federal spending I used federal government total expenditures - W019RCQ027SBEA. For GDP I used an annual series GDPA (A191RC1). They seemed to correspond to the Canadian variables I used but there may be differences in how they are constructed and what they cover. I know Winer and Ferris had a paper in CPP some time ago in which they compared Canadian and US public sector size and they noted that there were some differences in the measurement of public sector activities but I cannot remember them at the moment.

[rsj]

Hi Livio,

OK, you are not including principle payment, the difference is gross versus net interest. It's a huge difference! I plotted the difference between your BEA current interest outlays and my OMB interest payments:

https://fred.stlouisfed.org/graph/?g=d0AJ

BEA numbers are roughly double the OMB numbers.

OMB = Office of Management and Budget, which includes the Treasury data on interest payments. These are the people that hold the auctions and send out checks.
BEA = bureau of economic analysis which does NIPA.

To get from BEA Federal Data to OMB you need to subtract interest income received from interest income paid to get the net interest income paid.

A good discussion of this can be found in a recent Survey of Current Business article:

https://www.bea.gov/scb/pdf/2014/04%20April/0414_nipa_translation_of_federal_budget.pdf

See especially Table 6, section on "Net Interest"

I think the OMB data is the right one to use here, because if the government decides to sell $100 of bonds paying 3% and it uses half the money to buy bonds paying 3%, then the relevant interest payment for purposes of assessing things like fiscal sustainability or the interest burden is not $3 but $1.50, because if taxes need to be raised to pay interest, then the taxes are only going to be $1.50 per year, not $3 per year.

Why would a government decide to do something like that? Well, it has to do with politics and how various agencies are structured. For example, in the U.S. there is a social security trust fund that has been running surpluses and it uses those surpluses to purchase federal debt. Interest paid on the debt is then routed to the social security agency which uses the money to pay benefits.

But alternately, suppose the budget was unified. Then, when the social security payments were running in surplus, the money could have been used to retire government debt outright. In that case, the interest on the debt retired would never need to be paid. But the overall fiscal position of both governments is identical.

As another example, suppose a government endows a clean up fund by selling $100 worth of bonds and giving those bonds to the clean up fund, which uses the interest to pay for cleanup. The interest is paid by raising taxes by $3 per year.

Another government could just have easily decided not to stockpile the debt but to spend the $3 in cleanup out of its general budget, say by raising taxes $3 per year.

Both governments have the same net debt (0) and the same net interest payments (0). But one of these governments has $100 in gross debt and $3 in gross interest payments, that are offset by $100 in assets (held by the cleanup fund) and $3 in interest income received by the cleanup fund. When doing cross country comparisons, or assessing things like overall tax burden and fiscal sustainability, it's good to consolidate these numbers to get an apple to apple comparison, since all of these governments are in the same financial position.

[Livio Di Matteo]

Thanks for this rsj. That is alot to absorb. Your comment will serve as an important qualifier on the post given I did stick to the BEA numbers.