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Overspending, not lack of revenue, driving federal deficit; federal government has opportunity to balance the budget by 2011/12

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Release Date: March 1, 2010

VANCOUVER, BC-The Conservative government has no excuse for running deficits in upcoming budgets, and doing so limits its ability to provide Canadians with tax relief and improve the country's competitiveness, warns a new study released today by the Fraser Institute, Canada's leading public policy think-tank.

"The federal government is facing deficits for the next five years because of overspending, not a lack of revenue," said Niels Veldhuis, Fraser Institute senior economist and one of the study's co-authors.

"With the economy recovering and revenues expected to rebound this year, the government should not continue running deficits. Instead it should use this budget to start balancing the country's finances by 2011/12 and follow that up with a multi-billion dollar tax relief plan in the following three years."

The Fraser Institute study, Budget Balance should be the Federal Government's Focus , points out that although federal revenues decreased by $16.5 billion to $216.6 billion in 2009/10 from $233.1 billion in 2008/09, the decrease is expected to be very short-lived. Revenues are expected to rebound back to 2008/09 levels of $233.1 billion by 2010/11 and continue to grow at a robust average rate of 6.4 per cent until 2014/15.

In 2009/10, the Conservative government increased spending by $33.7 billion, primarily because of the stimulus package, which was described as a temporary plan to help boost the economy during the recession. But government projections now show that rather than decrease in 2011/12 as the stimulus plan comes to an end, government spending will actually remain at the 2010/11 level, followed by further increases over the next four years (2011/12 to 2014/15).

The study also shows that federal government spending was already increasing at unsustainable levels well before the recession. For instance, between 2000/01 and 2008/09, federal government program spending (total spending minus interest payments) increased at an average rate of 6.5 per cent-nearly twice as fast as average inflation and population growth (3.3 per cent) and faster than the average rate of economic growth (5.6 per cent).

"The government used the recession to further increase spending in the name of temporary economic stimulus. But this rapid increase in spending is now set to become the new base upon which the federal government will continue to grow unless the finance minister makes a serious commitment in the budget to cut spending," Veldhuis said.

Veldhuis recommends the government begin working towards a balanced budget by eliminating the $10.3 billion in stimulus spending planned for this year and the $1.1 billion for 2011/12. Remaining program spending should also be reduced by an additional four per cent from 2009/10 to 2010/11 and 2010/11 to 2011/12. This would produce a balanced budget by 2011/12.

With a balanced budget, the government would then have room to implement broad-based tax reductions including reducing personal income taxes and eliminating the capital gains tax. These would strengthen Canada's competitiveness and improve incentives for Canadians to work, save, invest, and be entrepreneurial.

"There is ample empirical evidence showing that tax relief is effective at encouraging economic activity whereas increased government spending is not," Veldhuis said.

The Fraser Institute report cites evidence from economic studies that examined past stimulus spending initiatives from around the world dating back several decades. The evidence shows that increased government spending fails to generate economic activity; however, tax cuts do. One study in particular, by Professors Christina and David Romer of the University of California at Berkley, found that each dollar of tax cuts has historically raised economic output (GDP) by about three dollars.

Veldhuis points out that the Conservative government's stimulus package is heavy on infrastructure spending and light on tax reductions. Just 13 per cent of the government stimulus package was dedicated to tax relief. On the other hand, 40 per cent of stimulus spending was targeted at infrastructure projects, with much of that not being spent until this year.

"With the economy now naturally coming out of recession, this government spending will compete with the private sector for resources, resulting in increased costs and fewer private-sector projects," he said.

"Rather than stay the course and continue stimulus spending, the government needs to use this budget to change direction and move towards balancing the books by fiscal year 2011/12 and follow that up with a prosperity-enhancing multi-year tax relief plan."



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