Trudeau government can keep campaign promise with relatively small spending cut

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Appeared in the Globe and Mail, February 23, 2018

During the 2015 federal election campaign, Prime Minister Justin Trudeau promised that his government would run modest budget deficits—no more than $10 billion annually—and balance the federal budget by the end of his mandate in 2019/20. He reaffirmed the balanced budget commitment shortly after taking office.

This promise has since been broken. The Trudeau government has run deficits nearly double the promised amount, and despite a growing economy, has no plan to balance the budget. In fact, according to projections by the Department of Finance, federal deficits could continue for the next 27 years.

Yet even with larger-than-promised deficits, the Trudeau government can still fulfill its pledge to balance the budget by 2019/20. But only with a change in fiscal direction—specifically, a much more disciplined approach to government spending.

Since coming into office, the government increased program spending from $253.9 billion in 2014/15 to a projected $304.9 billion in 2017/18—or 20.1 per cent in just three years. And the government’s average annual increase in program spending (6.3 per cent) has dwarfed growth in revenue (3.3 per cent), inflation plus population growth (2.7 per cent), and growth in nominal GDP (2.6 per cent).

Given the marked spending growth over the last three years, the reasonable approach to balancing the budget is to find savings and reduce spending rather than raise taxes to generate more revenue. Trying to balance the budget with further tax hikes would hurt the economy and the country’s competiveness, particularly given recent sweeping tax reforms in the United States.

More broadly, research conducted by Harvard economist Alberto Alesina and his colleagues finds that balancing the budget with spending reductions does less economic damage (in terms of GDP) than tax hikes. In fact, they cite the fiscal record of former Liberal Prime Minister Jean Chretien in the 1990s as evidence that spending reductions can help expand the economy.

But it’s not like the Trudeau Liberals need to cut spending as much as the Chretien Liberals did. To balance the budget by 2019/20, the Trudeau government need only reduce program spending from its current level of $304.9 billion to $301.7 billion—a $3.2 billion reduction, compared to the $51 billion increase since taking office. And it translates into a reduction of just 1 per cent over two years.

By contrast, the Chretien government reduced program spending by 9.7 per cent from 1994/95 to 1996/97 by finding savings through a comprehensive review of programs. If the Trudeau government undertakes a similar review, it will certainly find at least $3.2 billion in savings.

One place to start looking is business subsides, otherwise known as “corporate welfare.” A recent study identified $14 billion of federal spending and tax measures that give subsidies to particular businesses or sectors. And this analysis did not include the additional business subsidies announced in last year’s federal budget such as the nearly $1 billion for so-called technology “superclusters.”

While politicians often claim that corporate welfare improves economic performance, the evidence shows it generally does not stimulate the overall economy. Instead, it redirects resources from particular businesses or industries to those favoured by government.

In its upcoming budget, the Trudeau government can make good on its election promise to balance the budget by 2019/20. All it will take is relatively modest spending reductions and the will to make them happen.

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