Go for budget gold: Thursday’s budget is a chance for the Conservatives to end the wasteful stimulus, putting Canada back on track

Printer-friendly version
Appeared in the Financial Post

With no new initiatives expected, the 2010 federal budget that will be introduced Thursday by Finance Minister Jim Flaherty is quite likely the least anticipated in recent memory. This is due in large part to last year's irresponsible budget, which saddled Canadians with an expected $56-billion deficit this year and further deficits amounting to $109-billion over the next five years.

With no fiscal room to implement new spending or tax measures, budget 2010 will likely emphasize the government line of staying the course with respect to its two-year stimulus plan. Minister Flaherty is also expected to unveil a road map for bringing the budget back to balance, likely over five years.

Canadians should expect more. To use the Canadian metaphor of the day: Mr. Flaherty should go for gold. He has an opportunity to set Canada apart from the rest of the world, the way the then-Liberal government did back in 1995 when it set forth a plan to reduce spending and balance the budget.

The reforms initiated by Prime Minister Jean Chrétien and Finance Minister Paul Martin eliminated a deficit that is much larger than the current one (4.8 % of GDP compared to 3.7 %) within three years. This marked a remarkable fiscal transformation that, in part, made Canada the envy of the developed world. Spending reductions, balanced budgets, debt repayment, tax relief and improved competitiveness all contributed to our outstanding economic performance from 1997 to 2007.

To emulate previous success, Canadians need a serious commitment to balancing the books. The sooner the government gets its fiscal house in order, the sooner it can take action to reduce taxes and improve the country's competitiveness. To that end, Minister Flaherty should end his government's stimulus mistake and balance the books in two years (by 2011/12).

Budget 2010 should first eliminate the $10.3-billion in stimulus spending planned for this year (2010/11) and the $1.1-billion planned for 2011/12. The risk for 2010 and 2011 is that government stimulus spending (particularly infrastructure spending) will hit the economy as it naturally moves out of recession. As a result, the government will compete with the private sector for scarce resources, resulting in increased costs and fewer private sector projects.

The budget should also reduce remaining program spending by 4% from 2009/10 to 2010/11 and again from 2010/11 to 2011/12. The list of potential areas where the federal government could reduce or even eliminate spending with very little, if any, consequences on economic growth or social progress is long and includes regional development subsidies, corporate welfare, agricultural supports and broadcast subsidies.

In addition, transfers to the provinces should be reduced by the same percentage as federal program spending. In return for less money, the provinces should receive more autonomy to run social programs that are the exclusive areas of provincial jurisdiction (especially health care). Our own history shows that greater provincial autonomy will lead to more experimentation and better programs, at substantially lower cost.

Eliminating the remaining stimulus spending and reducing program spending by 4% a year would result in a balanced budget by 2011/12. As the figure shows, if the government held program spending to the rate need to compensate for inflation and population growth after 2011/12, revenues would exceed spending from 2011/12 to 2014/15.

This plan would leave federal spending $30-billion lower than what the federal government is currently projecting for 2014/15. Rather than be in deficit in 2014/15, the federal government would be in $24.8-billion surplus. That's a lot of money that could be used to reduce taxes and improve Canada's competitiveness. In fact, over the three year period, 2011/12 to 2014/15, the government could provide $52.1-billion in cumulative tax relief.

If the goal is to improve the economy, increase investment and create more jobs, tax relief is a much better way forward than more government spending. In fact, the academic literature provides ample evidence that incentive-improving tax relief encourages economic activity, whereas government spending does not.

For instance, an important recent analysis by Harvard economists Alberto Alesina and Silvia Ardagna of stimulus initiatives in Canada and 20 other industrialized countries from 1970 to 2007 found that successful stimulus initiatives - those that increase economic growth - focus on tax cuts while unsuccessful ones rely on government spending. Another recent study co-authored by Christina Romer (an economic adviser to U.S. President Barack Obama and professor at the University of California at Berkley) found that a dollar of tax cuts has historically raised economic output (GDP) by about three dollars.

With a nearly $25-billion surplus in 2014/15, the federal government could significantly reduce Canada's uncompetitive personal income tax rates, eliminate the capital gains tax and further reduce the corporate income tax rate. All would improve the incentives for Canadians and businesses to engage in productive economic activity.

Rather than stay the course and continue to increase spending, Minister Flaherty should use the 2010 budget to set Canada on the path to greater prosperity. Spending cuts, balanced budgets and tax relief worked wonders once before. Canadians need them again.

Subscribe to the Fraser Institute

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