How Flaherty Could have cut Ottawa’s $56-billion Deficit — By Two-thirds

Commentary, Taxation

When governments wish to avoid frank admissions about bad budget numbers, including those produced by their own poor choices, one option is to try and highlight the “bright side” of such unpleasantness.

That was Finance Minister Jim Flaherty’s approach on the federal government’s $56-billion deficit–up $5-billion from the January budget forecast. In his recent Victoria speech where he announced the newest deep-in-hock figure, Flaherty asserted that “On the fiscal side, we are in the best situation of any country in the G7.” He also asked his audience to compare Canada to “our southern neighbour now forced to contemplate a future of cumulative deficits in the trillions.”

If patriotism is the last refuge of scoundrels, a comparison with a near-bankrupt neighbour to divert attention from one’s own red ink is the first refuge of a government unwilling to say “no” to most supplicants.

Fact is, a large chunk of this year’s $56-billion deficit is the result of choices made over the past year. Here’s how federal Conservatives could made the deficit smaller.

Conservatives could have said no to the multi-billion dollar bailout for the auto industry. In one year, the federal and Ontario governments have offered over $15-billion in cash for research, straight grants, insurance programs for auto suppliers and loans—which the Prime Minister himself noted would not all be repaid. Assume the federal government’s share of such lolly was $10-billion. Had Ottawa said no, the federal deficit would be “only” $46-billion.

But Ottawa has also been loath to disappoint others. A Finance minister with pruning shears might have sliced $300 million this year in bio-fuel subsidies (from a planned $1.5 billion over nine years). Or he might have refused $250 million to Air Canada. Another $1-billion for the forest industry (to subsidize that industry after the Americans subsidized theirs) could have been placed in the “no” file. Flaherty might also have cancelled $206 million for a new southern Ontario regional development agency, and then chopped other regional subsidy programs by $650 million.

Add to such savings a $600-million take-away from VIA Rail (its $200-million plus annual operating subsidy plus the new capital grant of $407 million), and in total, those reductions would amount to $3-billion. That means this year’s forecast deficit would be $43-billion.

Where else might federal Tories have trimmed spending? On other corporate welfare beyond just the auto industry. The last year for which comprehensive statistics are available is 2006 when $6-billion annually was handed out to businesses. Suppose Prime Minister Harper made good on previous commitment to cut such subsidies. Assuming no annual increase in cash-for-clunky-companies beyond the auto sector bailouts noted above (an iffy assumption), pretend another $6-billion was subtracted from this year’s deficit. Now we’re down to $37-billion.

Then dump some of the shovel-ready infrastructure spending outlined in the January budget. (Ottawa budgeted $12-billion over two years.) If only $2 billion was spent each year ($4-billion less annually), the 2009/10 budget deficit would be down to $33-billion.

Another place to cut federal spending could have been federal-provincial transfers. But Flaherty begged off that option in his Victoria speech. With respect to the example set by Paul Martin and Jean Chretien in the 1990s, Flaherty asserted that “The previous Liberal government got rid of the deficit not by making smart reductions in government spending, but by slashing federal transfers to provincial governments.”

Right–so the Conservative strategy is to enact no reduction in government spending but instead “stimulate” Canada into deeper debt even though the recession was already winding down before the first federal shovel hit the dirt. In other words, the stimulus as an antidote to the recession is largely unneeded, ineffectual, or both.

As for the provinces, back in the 1990s when Flaherty’s current boss was a Reform MP and later, head of the National Citizens Coalition, cutting transfers to the provinces would have appealed to Stephen Harper. After all, to make each level of government responsible for its own taxing and spending forces governments to be more accountable. When transfers exist, each level can blame the other for not providing enough cash or for spending irresponsibly.

So suppose federal Conservatives gave provincial transfers a nip-and-tuck. Instead of sending $60.6 billion to provincial governments as the federal department of Finance projects on its own website, suppose Ottawa sent the provinces just what they provided back in the Dickensian dark days of 2006/07—$45.4-billion. That’s $15.2 billion less than planned in this budget year. All of a sudden, Ottawa’s deficit would be $18- billion.

Sure, an $18-billion deficit is still a lot of money, but it’s not $56-billion–only one-third, actually. Deficits are not always avoidable, especially if revenues suddenly drop due to a recession. But this year’s federal deficit doesn’t have to be as large as the Conservatives claim; much of it is the result of choices.