VANCOUVER, BC—Finance Minister Jim Flaherty should follow the example of the Liberal government’s 1995 budget and cut spending to reduce the deficit, according to a new report from the Fraser Institute, Canada’s leading public policy think-tank.
“The Liberal budget of 1995 introduced by then-finance minister Paul Martin is one of the most important budgets in Canadian history,” said Niels Veldhuis, Fraser Institute vice-president of Canadian policy research and co-author of Budget Blueprint: How Lessons from Canada’s 1995 Budget Can Be Applied Today.
“Through real reductions in both program spending and public-sector employment, Martin introduced fundamental fiscal reforms in 1995 that led to a decade of prosperity. Now is the time for Finance Minister Flaherty to take similar, decisive steps that would allow him to balance the federal budget within the next two years.”
The new Fraser Institute study examines the current fiscal problems facing the country and finds parallels to the situation experienced in the 1980s and early 1990s when the government faced large deficits, mounting debt, and rising interest rates.
“The Conservative government’s current plan calls for slowing the growth in spending for the next five years while hoping strong economic growth brings higher revenues to balance the budget,” Veldhuis said
“This is precisely what happened from the early 1980s to 1995, as governments tried to constrain the growth in spending while assuming that higher revenues would come. Unfortunately, governments were unable to control spending. And there is nothing in the current government's track record that suggests it will be able to slow spending growth.”
The report then explores the Liberal’s 1995 budget, which reduced program spending from $118.3 billion in 1994/95 to $107.9 billion in 1996/97—a reduction of $10.4 billion or 8.8 per cent over a two-year period. The 1995 budget also announced a reduction of public-sector employment by 45,000 or 14 per cent.
“Today’s federal government does not expect to return to a balanced budget until 2015/16, which will result in $61.6 billion of added debt. Our analysis recommends the government follow the approach set by Paul Martin in 1995 and reduce spending. This would generate a $22.9 billion cumulative surplus over the same period due to the attainment of a balanced budget much sooner than currently anticipated,” Veldhuis said.
The authors maintain that, rather than trying to slow the growth in spending increases and hope for strong revenue growth over time—which in the ’80s and early ’90s left Canada with a large debt and substantial interest payments—the upcoming budget should actually reduce spending. Specifically, the budget should:
- Return program spending to levels prescribed in pre-stimulus budgets. Use a methodical approach aimed at prioritizing spending so that important areas are spared deep cuts while lower priority areas carry a greater burden for the reduction in spending. A similar process was used during the “Program Review” of 1995. By definition, stimulus spending should be temporary and short term with spending levels returning to normal once the stimulus spending is completed. However, program spending by the Conservative government has not returned to pre-stimulus levels, and instead grows from the new base established by the stimulus spending.
- Marginally reduce provincial health transfer payments in exchange for granting the provinces greater flexibility and autonomy in delivering health care. In 1995, the Liberal government made similar changes to transfers in support of social services. The reduced transfers coupled with greater provincial autonomy and responsibility for welfare meant the provinces had the incentive and authority to design and deliver better social services. These tactics should be applied to health care today.
“The federal government should reduce health transfers to the provinces by $3.1 billion per year over the next two years, while simultaneously providing the provinces with more flexibility to experiment with different models of health care delivery within a universal and portable framework,” Veldhuis said.
According to the report, the two reforms would save $10.9 billion in program spending in 2011/12 compared to 2010/11 and another $11 billion in 2012/13 compared to 2011/12. The proposed fiscal plan would result in a small budget surplus in 2012/13.
“The sooner we balance the budget, the sooner the government can return to surpluses, which allow for permanent debt reductions and ultimately, additional tax relief,” Veldhuis said.
“In order to revive the economy to pre-recession levels, the government must learn from the Chrétien-Martin 1995 budget, which resulted in federal surpluses in each and every year between 1997/98 and 2007/08. Now is the time to repeat that success, and that means the government must reduce spending.”