Government Diet Plan

Worth A Look, Role of Government, Frontier Centre

John Manley, federal Finance Minister, will rise in the House of Commons this coming Tuesday to present his government’s latest budget.

There is no suspense, no great anticipation, indeed little sign of any buzz regarding this financial statement. The key reason is that we know most of what we need to know already.

Government spinmeisters have worked day and night for weeks on end to ensure that all possible new policies have been leaked. Their motivation is clear: Release a multitude of trial balloons to ensure that nothing controversial will mar budget day. An equally important consideration is to bring the maximum possible number of stakeholders onside prior to the big event.

In a word, the budget is all about spending. Spending on regular programs, spending on the planned growth in those programs, and spending from the unplanned surplus generated through overtaxation on all of us. It was thought early last year that the first two of these items would total more than $180-billion. At a time of economic uncertainty, the surplus on top of this would cover little more than a fiscal contingency and debt repayment of $3-billion.

Now, after a year of solid job gains and associated tax revenues, the surplus is approaching $10-billion.

This money rightfully belongs to contributing taxpayers, as the government had no publicly stated intention to overshoot its targets. The optimal policy would be to return the money (with thanks) in the form of a one-time payment or a permanent tax cut. The latter is preferable for its laudable impact on economic growth and to reduce the odds of further overtaxation in the future.

Alas, we live in an era of incessant demands on government and so we will all have to settle for a second or third best — or even worse — approach. Besides, it pleases politicians to no end to play the role of surrogate Santa, dispensing other people’s money to happy recipients of all shapes and sizes.

As a result, we have a list of new and expanded budget policies that could wallpaper the House of Commons from floor to ceiling. Here is a partial tally: a down payment and multi-year funding for health care through provincial transfers, more for defence, enhanced child benefits, infrastructure, Kyoto costs, aboriginal programs, skills training, immigration, international aid, high-tech R&D, a dozen more programs from the Throne Speech, and even a high speed train. On the tax side, we have suggestions to reduce EI premiums, raise RRSP limits and (as a sop to those against more spending) a cut in corporate capital taxes.

What is the justification for this splurge, besides a wish to spend because you can do so? There seems to be no rhyme or reason here other than addressing the demands of the maximum number of social groups in this country.

A much better policy would be to remove the apparently irresistible temptation to spend. A tried and true approach uses broad-based tax cuts and a phased program to shrink government. International studies are quite clear: A smaller, more focused and less wasteful public sector is associated with faster economic growth and a higher standard of living. The growth-maximizing size of government is typically estimated at somewhere around one-quarter of GDP. Canada currently spends nearly 40%.

You actually do not have to look far to support this proposition. Ontario and Alberta are the richest and greatest growing jurisdictions in Canada. Ontario spends 35% (including Ottawa) and Alberta 26% of their provincial economies on government. The other provinces are below the average Canadian per capita income, and trail behind almost all U.S. states. They collectively spend 48% of their GDP on government.

Or look south to the United States. The richest and fastest growing states, 11 in all with sufficient size to matter, spend 10 points of GDP less on state and local government and six points less on federal spending than the other states. At the same time, their government spending is growing more slowly, rising by less than one-half the pace of the rest of the country over the past decade. Their economic track record in the 1990s is impressive: Half of the national productivity growth comes from less than 40% of the workers. More growth and less government — and they all recently cut taxes.

This fiscal policy approach is a win-win scenario for taxpayers, once you get beyond the carping of the “spend more” lobby, as it puts more money in peoples’ pockets now and offers more economic opportunities in the future.

A target aiming to put all Canadian governments on a diet until they are between one-quarter and three-tenths of the economy is feasible over a five-year time span. Assuming that the feds account for a proportional share of this transition, here is what the program could look like.

First, announce a five-year staged reduction in taxes. Revenues would need to drop 20% from present levels to ensure that the smaller government-in-GDP target is achieved. A federal tax cut of at least $75-billion would be generated and perhaps guaranteed with retroactive year-end changes to refund any surpluses. This is much greater than the current Liberal claim for their $100-billion tax cut, one that is mostly inflation indexing and increases to child benefits.

Second, remain on course with debt reduction and contingency reserves. These useful Liberal government innovations can ensure that debt servicing costs continue to drop. However, perhaps instead of growing the government’s foreign assets, as under the current government, there could be an effort to directly pay down debt.

Third, institute a program review akin to the Paul Martin approach in 1995. Total program expenditures would have to fall by $26-billion or 20%, taking spending back to an inflation-adjusted per capita level last seen in 1988. No lack of government then, many would agree.

Most of the savings can be found in direct program spending, leaving things like the CPP and Old Age Security to grow. For example, reversing the 40% increase in non-defence department and agency spending since 1996 would yield $12-billion alone. A return to the Employment Insurance reforms abandoned before the last election could save several billion. Significant reductions in cultural and corporate subsidies and a program of Crown corporation privatizations would be even more productive. As a matter of fiscal leadership, and to encourage provincial governments to reform and slim their own spending, provincial transfers should be reduced or tax points transferred.

This program would not come without significant political opposition — too many noisy groups today have a vested interest in an ever-larger government. However, with the country’s standard of living at stake, farsighted politicians should emphasize generating future prosperity. The solution to the affordability question for all public spending is best answered with a larger and stronger economy and a richer tax base. That can be achieved with less government spending today.

Mark Mullins is an economic consultant and financial markets analyst.

February 15, 2003

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