IMF Report Highlights Dangers of Bloated, Unproductive Public Sector

Commentary, Public Sector, Ian Madsen

The International Monetary Fund (IMF), in a report released with its latest World Financial Stability study, critiqued Italy, chiding the perennial underperformer for its famously large, unaffordable and growth-stifling public sector.

Why this matters to anyone outside that beautiful, historic, Mediterranean country is because the follies of the modern Romans are not unique.  They suffuse Canada and other supposedly better-run nations:  the United States France, and the UK, for example, and the ‘emerging’ countries of India and Brazil.

Nevertheless, the IMF took Rome specifically to task for its turgid bureaucracy, its expensive tax burden, and other policies that make it slow, expensive, and difficult to start or run a business.

Italy also ranks poorly in the World Bank’s Ease of Doing Business Index.  Unemployment has exceeded European Union averages for decades; economic growth has been flat in most of those years.

Demographically, Italy is in bad shape, too; with a very low birthrate, its growing elderly population requires ever more pension and health care funding.  Low-skilled immigration surges while educated and skilled young people emigrate.  Public debt has exploded; debt servicing is a serious diversion of funds from other government services – a problem that is metastasizing.

Successive Italian governments have recognized these ills, but few reforms have been made.

Yet, many of Italy’s ills are echoed in Canada, just less exaggerated and masked by other things.  Our productivity growth rate is abysmal; an educated, skilled workforce and abundant capital and raw resources have created substantial employment in new, innovative sectors, as has occurred in the United States.  Poor diffusion and adoption of new technology means little efficiency and productivity gains versus, say, in Germany.  Canadian export growth is tepid, as our firms have been slow to seize opportunities overseas.  Public debt is soaring, again, hence debt servicing crowds out other needs.

The Canadian economy is overly dependent on traditional extractive industries and still protective of mature, possibly uncompetitive industries (autos and aerospace, for example).  Meanwhile, taxes rise and public sector spending escalates; from decisions made in Ottawa, as well as those made in some of the major provinces:  Ontario, Manitoba, Alberta, and British Columbia specifically.  Real estate and construction bubbles have masked the serious problems that exist in the Vancouver and Toronto regions, as overseas immigrants seek safe havens for themselves, their families, businesses and money.

If foreign capital inflow and the federal and provincial debt-financed spending is removed, the economic reality of Canada is not much better than Italy’s.  In the recent World Economic Forum study on global competitiveness, Canada is not even in the top ten countries; Singapore is first, then the United States, then some European nations and Japan.

What has inexorably grown year after year in Canada is its huge, expensive public sector – whose spending has, in fact, not increased our prosperity, but has stifled it.  Its main functions, so it seems, are to increase spending on programs that are unproductive, such as the CBC, and to, in many cases duplicate the private sector (financing mortgages for businesses); or funding millions of staff to regulate, hinder, and penalize private sector investors; or to redistribute money, creating disincentives for people to seek gainful employment and thus pay taxes which will ultimately support government programs.

Public sector spending represents nearly 40% of GDP, and there is unlikely to be anything new to be discovered that government can or should do that is not already being done by individuals, companies, and non-profit organizations.  In the future, there can only be diminishing returns from increased government ‘investment’.  Perhaps the returns will be negative.

If we did not have a strong, healthy flow of well-qualified immigrants, easing our own demographic challenge, we would look just like Italy; except with worse weather, food, art or wine.