The national debt has become a focal point of discussion recently, partly due to debates over the One Big Beautiful Bill Act. Organizations like the Cato Institute and R Street have contributed to the conversation, while voices from various political spectrums, including The Ezra Klein Show at The New York Times, have also weighed in. Elon Musk highlighted the issue by describing the debt as “crushingly unsustainable” in a tweet.
The rising national debt poses several challenges, such as crowding out private investment and increasing interest rates, which can negatively impact employment and wage rates. However, addressing this issue doesn’t necessarily need to be seen as painful. Spending cuts could potentially strengthen the economy.
According to the International Monetary Fund (IMF), reducing the debt-to-GDP ratio by 10 points is linked with a 1.4 percent increase in long-term real GDP growth. This suggests that deficit reduction could lead to stronger economic performance.
Canada’s experience in the early 1990s serves as an example. Faced with a dire fiscal situation, Canada implemented significant reforms under Prime Minister Jean Chrétien and Finance Minister Paul Martin in 1995. They reduced federal program spending significantly more than they increased taxes.
These efforts led to positive outcomes: turning a federal deficit into a surplus by FY 1996-97, reducing the debt-to-GDP ratio by 30 percentage points within a decade, decreasing unemployment from over 11 percent to under 7 percent by decade’s end, and achieving real GDP growth averaging over 3 percent annually from the late 1990s through mid-2000s.
Not all of Canada’s growth was due solely to fiscal consolidation; trade expansion under NAFTA also played a role. Nonetheless, Canada’s turnaround demonstrated that well-designed spending cuts could alleviate pressure on capital markets and boost investor confidence.
The IMF notes that deficit reduction through spending cuts often results in better growth outcomes than tax increases in advanced economies because they are generally more credible and less distortionary.
Currently, the United States faces a similar fiscal outlook with its debt-to-GDP ratio exceeding 120 percent. Interest payments have surpassed both defense and Medicare spending levels. There is growing recognition across ideological lines that this path is unsustainable.
Canada’s experience shows that budget cuts can restore fiscal balance and promote long-term growth if approached with political will and discipline. With U.S. government spending exceeding $6 trillion annually, there are numerous opportunities for reform if austerity is viewed not as punishment but as an opportunity for positive change.
