Canada's budget triumph

I've just read David Henderon's working paper on the Canadian budget reforms of the 1990s.

the average interest rate on the federal debt was about 8 percent.  The growth rate of nominal GDP was about 4.5 percent.  The ratio of federal debt to GDP was approaching 75 percent.  That meant that in a given year, the government was spending eight percent of 75 percent of GDP, which is 6 percent of GDP, just for interest on the debt. 

So, simply cutting back spending on programs to equal revenue would leave a deficit of six percent of GDP.  With GDP rising by only 4.5 percent, the debt/GDP ratio would rise.  How could the government prevent this ratio from rising? 

You might think that the answer was to have the deficit equal ―only 4.5 percent of GDP.  But remember that the interest rate on this new addition to the debt would be eight percent, which means that the debt/GDP ratio would still rise.  The only way to keep the debt/GDP ratio from rising, it turns out, was to get the deficit down to 2.625 percent of GDP

The Appendix shows the arithmetic - has anyone done this for the UK in 2010?

Comments

[MBT Shoes]

It's so nice to have you do all of the research for us. It makes our decision making so much easier!! Thanks.

[Jade Jewellery]

There are a number of very nice points made here. Generally, I’m not really keen on information sites. then again, once in a while all of us should take notice. Inspiring, I am thankful to you.

[abercrombie france]

What a fun pattern! It’s great to hear from you and see what you’ve sent up to. All of the projects look great! You make it so simple to this. Thanks