Cut $10-billion now; Flaherty should drop entire departments and programs

Printer-friendly version
Appeared in the Financial Post
On Monday, Finance Minister Jim Flaherty held his traditional pre-budget consultation with a number of private-sector economists, who all appear to be predicting improved growth in the Canadian economy for the coming year. This no doubt comes as welcome news to the Finance Minister, as he prepares to unveil his next budget on March 29.

But the Finance Minister should not be swayed by these optimistic growth projections; he needs to bring in a budget that will take serious aim at balancing the nation's book.

Before last year's election, the Conservatives put forth a five-year plan to balance the budget that relied on rather rosy projections of revenue growth (average rate of 5.6%) and uncharacteristically low spending growth (average rate of 2.0%).

As we noted on this page shortly after the budget was delivered, a plan that attempts to grow out of deficit is full of risk and the odds are stacked against it.

The group of economists that the federal government relies on began 2011 rather optimistically. However, the rosy projections were significantly revised downward throughout the year and by November the Conservatives announced a one-year delay to their balanced budget target date.

To prevent such announcements in the future, the Conservatives should produce a credible plan to eliminate the deficit - one that balances the budget in two years, not five. The Conservatives, after all, are armed with the first majority government in nearly eight years and polls showing that nearly three of every four Canadians want to see significant spending cuts, of more than 5%.

The first step is to ensure that program spending is returned to prestimulus levels. While Canadians were led to believe the stimulus spending of 2009 was temporary, it was anything but. Spending increased by $35-billion in 2009-10 partly as a result of the temporary stimulus, but rather than decrease by roughly the same amount the following year, the spending became the baseline for future budgets.

To reduce current spending to its 2008-09 pre-stimulus level (of course increased by annual population growth and inflation), Mr. Flaherty should reduce program spending by $10.0-billion in 2012-13. Under this plan the budget will be balanced by 2013-14 - the same two-year time horizon achieved by the federal Liberals in the 1990s.

The plan would reduce the tremendous debt burden being passed to the next generation of taxpayers. Specifically, the projected federal debt would decrease by $55-billion over the next five years and result in lower annual interest costs.

The plan also mitigates the risks associated with future economic shocks and leaves the Conservatives with significant upside potential. That is, if revenues rebound robustly, the government would have the fiscal room to implement a much-needed multi-year plan to reduce personal income taxes.

Spending reductions, balanced budgets, debt repayment, and tax relief worked wonders before and made Canada the envy of the developed world. Indeed, Canada's remarkable fiscal transformation that began in the mid-1990s contributed significantly to our outstanding economic performance from 1997 to 2007.

While our plan calls for a $10-billion spending reduction next year, it should not prove a difficult task. The government has already asked each department to submit proposals for cutbacks of 5% and 10%, saving the government between $4-billion and $8 billion annually. But instead of realizing these savings immediately, the government un-fortunately seems poised to phase them in over three years.

More fundamentally, some departments and programs ought to be eliminated rather than reduced by a small nominal amount. To that end, government spending needs to be prioritized so that important areas are spared deep cuts while lower priority areas carry a greater burden of the spending reductions.

Rather than ask ministers in each department to find 5% or 10% in savings, the Conservatives should evaluate each department using more fundamental and specific criteria. To test whether a department or program should be cut or eliminated, they should ask the following: Is government involvement necessary? Is there an appropriate role for the federal government in this area? Is there an opportunity for public-private partnerships? Is the spending efficient and affordable?

A comprehensive examination of this nature would structurally change the federal government, much like the Liberal reforms of the 1990s. Easy targets for deep cuts (or outright elimination) would include regional development spending, business subsidies, green-energy initiatives, subsidies to the CBC, spending by Agriculture Canada, and public-sector wage and benefit premiums.

With a majority government and support from average Canadians, now is the time for Mr. Flaherty and the Conservatives to deliver a budget that sets Canada back on the right fiscal path.

Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.