“Every mile is two in winter,” said a long-dead British poet. His words will resonate with campaign troops dragged out in the depths of January for a new federal election. But cold air also sharpens the mind. Let’s hope that it will turn voters away from nasty rhetoric and towards some fundamental thoughts on policy reform needed in Ottawa.
Canada moves into the election in surprisingly strong fiscal shape, but it would be naïve to ignore some powerful forces that loom on the policy horizon. These forces are disrupting major portions of the Canadian economy and will require some heavy lifting in response.
Compared to the fiscal irresponsibility of the Bush government or the paralyzed German coalition, Canada shines like a star, the only G7 country with a fiscal surplus and declining debt. But, domestically, things look much murkier. During the 17 months of minority government, when not engrossed in the Gomery inquiry, our politicians have lurched around with hasty spending programs. Only on the eve of an election did we see a patchwork of tax reductions, heavily weighted, of course, to the distant future in 2010 — an eternity in politics.
Consider that the Chinese will be exporting cars to Canada soon at $7,000 a pop, one example of the huge pressure they will place on our entire manufacturing sector. Brain work like legal and accounting services is trickling over to India, which does it overnight for a tenth of the local cost. Meanwhile, Canadian taxes, which discourage investment and retard productivity, generally top the range compared to competing jurisdictions.
World-flattening forces that are speeding up international trade are placing unsustainable pressure on Canada’s wealth-creating private sector. At some point, the private sector will no longer be able to foot the bill for the increasingly obsolete policy models that riddle the public sector. How long, for example, can our politicians pour billions into the black hole of unreformed health care, a low-performing monopoly that resists measurement and simple accountability, with little or nothing to show for it? We must break away from the simplistic tendency to throw money at complex problems and avoid structural reforms.
Consider what our competitive position would be had federal spending held constant in line with population growth plus inflation. We would have had $17.1 billion available now for federal tax cuts, enough either to cut corporate taxes by 50 per cent, personal income taxes by 20 per cent, or chop the GST to four per cent. Instead, we spray piles of cash at the usual hodgepodge of programs, particularly health care, which suffer from flawed design more than a shortage of resources.
Or consider the research that estimates the optimal size of government—the size where economic growth is maximized—is 30 per cent of the economy. The size of government now is 40.5 per cent. To put in perspective how difficult it will be to get that number down, consider that the $17 billion mentioned above tax would reduce the government size by only one per cent to 39.5 per cent. Not so much, but a critical move in the right direction as the Chinas and Indias of the world gear up to eat our lunch. Reducing the size of government relative to the economy will not only stimulate much higher rates of economic growth, it will ultimately deliver more revenue to our treasury.
Let’s consider where the forces of globalization will force the policy revamp to go. The public sector will have to retreat from the in-house production of commercial services and buy them instead from competing suppliers. The efficiencies will be substantial. We will also see a much needed “sorting out” of the roles of different levels of government. The feds should abandon areas where they have minimal competence and no jurisdiction in our constitution. This means getting out of daycare, infrastructure programs and various social transfers, plus egregiously counter-productive regional subsidy programs, including equalization.
These delay and retard policy innovation, while preserving an oversized, low-performance public sector that delivers so little while keeping spending and taxes counterproductively high. Ontario and Alberta have both twigged to the fact that the “haves” simply pay “have-nots” to stay poor. In the brave new world of China and India, this simply will no longer be on.
Finally, while these changes will be fought tooth and nail by the many interest groups that drive our public policy, somehow we will have to implement two basic reforms. First, in light of the vote-buying scandal, a fundamental redesign of government to install firewalls between politicians and the administration of government programs, like the system functioning superbly in New Zealand. Second, we need an economic constitution which prevents the type of spending frenzy recently witnessed in Ottawa.
Don’t hold your breath this election. But the train of better policy is coming, folks. Our political parties had better to get in front of it before it runs them over.