Budget like it's 1995
Slash or spend? Cut or conserve? The federal government will bring down its budget on March 22. What should be in it? We ask five prominent Canadian think-tanks to offer their fiscal fix for the coming year.
Over the past five years in office, the federal Conservatives have not exactly been a bastion of fiscal conservatism. But on March 22, Prime Minister Stephen Harper and Finance Minister Jim Flaherty have an opportunity to re-define their fiscal legacy.
To do it, they need to produce a plan similar to the 1995 budget delivered by then prime-minister Jean Chrétien and finance minister Paul Martin. Such an austerity budget would not only put Canada on the path to greater prosperity, but might actually increase the Conservatives' chances of electoral success.
The government is currently pinning its hopes for a balanced budget in five years on a combination of higher revenues and successfully slowing the growth in spending. Specifically, the Conservatives expect revenues to grow at an average rate of 5.6% over the next five years while planning to hold spending increases to an average rate of 1.8%.
This same approach failed drastically in the 1980s and early 1990s. Successive federal governments attempted, but ultimately failed, to balance the budget by trying to slow the growth in spending.
Nothing in the current Conservative government's track record suggests the results will be different this time. Even be-fore the financial crisis and its massive stimulus spending, the Conservatives increased spending by an average rate of 5.5%.
Rather than stick to their current plan, Harper and Flaherty can set Canada apart from the rest of the world, much like the Liberals did back in 1995, when they set forth a plan to reduce spending and balance the budget.
Under Chrétien and Martin, the Liberals enacted historic reforms, starting with their proposal to cut actual program spending -not spending growth -by almost 9% over just two years. The Liberals even outperformed their goal and reduced spending from $123.2-billion to $111.3billion -a 9.7% drop. In the process, they reduced the size of the federal government relative to the overall economy from 16% to 13.3%.
Unlike the incumbent Conservatives, the Liberals did not spare any spending from potential cuts. The Tories have explicitly stated they will not reduce or change the level of transfers to the provinces. But under the Chrétien Liberals, everything was up for review. Transfers to the provinces, business subsidies, spending on transportation, military spending and Employment Insurance benefits were all scaled back. The Liberals also enacted reforms that enabled the government to get more and better results from less spending.
The Conservative government should heed the lessons of 1995 and decisively reduce spending in its next budget, to balance the books in two years -not five. As a first step, the Conservatives should ensure that the temporary stimulus money introduced in 2009 is actually temporary. Under the current plan, program spending will not return to pre-stimulus levels, but instead will grow from the new base established by the stimulus package.
A reduction in program spending of $15.7-billion, or 6.3%, by 2012/13 would bring total spending to pre-stimulus levels. This is a modest reduction that is nowhere near the cuts that followed the Liberals' 1995 budget.
As in the 1995 budget, the Conservatives ought to trim less from high-priority items, and more from low-priority ones. They could start by significantly reducing corporate subsidies, an area the Liberals cut by 60%, and one that has grown substantially under the Conservative regime.
Taking such measures requires the Prime Minister and his colleagues to make tough choices -choices they once championed as members of the opposition. Perhaps their newfound temerity stems from the conventional wisdom that voters punish austerity minded and deficit-cutting politicians.
But a recent study led by Harvard professor Alberto Alesina, The Electoral Consequences of Large Fiscal Adjustments, tells a different story. Alesina examined data on 19 highly developed countries (including Canada) from 1975 to 2008 to determine whether governments that quickly and significantly reduce budget deficits are eventually voted out of office.
They found that deficit-cutting governments did not face high political costs. In fact, governments that avoided addressing the deficit tended to lose subsequent elections more often than average.
The message for the Conservatives is clear. History and evidence show that a truly austere budget is not only achievable but is likely a politically smart move. Will they take up the challenge?
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