The Radical Plan Hidden in Flaherty’s Sedate Budget

Commentary, Frontier Centre, Taxation, Worth A Look

Finance Minister Jim Flaherty achieved a number of objectives in his first bullet-proof budget, which was largely free of partisan contention and ideological conflict. It espoused cautious fiscal management. It affirmed incremental change – or, often enough, no change at all.

Mr. Flaherty’s refusal to go radical, or to go mean, drove the opposition (and some conservatives) to distraction. Samuel Butler, the Victorian novelist, anticipated precisely this kind of imbroglio. “It is not he who gains the exact point in dispute who scores most in controversy,” Butler said, “but he who has shown the better temper.” In last week’s budget, it was the calm, cool and collected Conservative Finance Minister who sounded rational; the NDP Leader, Tom Mulcair, and the Interim Liberal Leader, Bob Rae, who sounded angry and extreme.

Mr. Flaherty scored by delivering a budget bereft of apocalyptic headlines, the normal early indicator (whether real or simulated) of a budget’s temperament. CBC and CTV news anchors appeared shocked and, indeed, stunned when they discovered on budget day that they could not proclaim an era of draconian restraint. By taking everything down a notch, Mr. Flaherty’s budget performed a supplementary public service. Whether federal or provincial, government budgets in this country need to be demythologized – and recognized, for the most part, as a relatively mundane form of routine bookkeeping.

It took a half century of incremental changes to take this country to the brink of economic collapse in the 1990s. Before it’s over, it will require a half century of incremental changes to restore Canada to a sound financial basis. Incremental reform, after all, is how all successful governments adapt, either to changes in the public mood or to dead-end fiscal error. Former Liberal finance minister Paul Martin began Canada’s incremental return to thrift; though interrupted by recession, Mr. Flaherty continues it – except with more skill and, one can only hope, with more permanence.

Judged this way, the Flaherty budget of 2012-13 is a conservative document. It calls for a quick end to federal deficits, probably within the next couple of years. It programs an early return to a paying down of federal debt. It promises a gradual reduction in the relative size of the federal government, as a share of gross domestic product, to its historic post-Second World War lows of 12 per cent (from 14.7 per cent today).

Forget the forgone pennies. Think of the forgone dollars. In the 1970s and 1980s, the federal government consumed as much as 20 per cent of GDP. Mr. Martin took this percentage down, but briefly, to 12 per cent in 2000; Mr. Flaherty proposes to match Mr. Martin.

We can easily calculate the practical difference of a somewhat more limited government. Canada’s GDP is $1.5-trillion; 1 per cent of it is $15-billion. A federal government that consumes 12 per cent of GDP, rather than 20 per cent, liberates 8 per cent of the country’s GDP – freeing $120-billion annually from the command and control of the state.

This is significant. Extended across 10 years, this denationalization of GDP would amount to $1.2-trillion, almost equal to the country’s entire GDP for a single year. This liberated wealth could be used more productively than it otherwise would simply as government revenue.

Further, after five years of minority government, and its associated profligate excess, Mr. Flaherty may finally get spending under control. In 2011-12, spending increased by $2.3-billion, or 1 per cent. From 2012-13 through 2016-17, federal spending is projected to rise by less than 2 per cent a year. In each of these years, Mr. Flaherty expects, the increase in spending will be less than the combined rate of inflation (assume 2.5 per cent) and the increase in population (assume 1.4 per cent).

In real-dollar terms, federal spending should decline incrementally every year. Some conservatives might want a faster decline, but they need to recognize that Mr. Flaherty’s incremental decline is triple-S: slow, steady, but sustainable, too. This is roughly as good as it’s going to get.

When the deficits end, a further $30-billion a year, more or less, will be liberated (for payments on the debt and for personal tax cuts) – by which time Mr. Flaherty will have freed hundreds of billions of dollars from government service. And that’s radical.