Who's better having the money—governments or individual Canadians

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Appeared in the Financial Post, January 17, 2018

Much, if not all policy debates, ultimately boil down to a single fundamental question—is the city, province or country, and more specifically its residents, better off having more or less of their income. Advocates for larger government argue that people are better off having less of their own money so that government can collectively provide some service, or transfer income, or do some other good. Those arguing for smaller government suggest that individuals and families are better placed to make decisions for themselves by having more of their own money.

While we have fairly clear political delineations on this issue—the NDP and Liberals prefer more government and the Conservatives less—what does the actual data tell us about the costs and benefits of more or less government?

There is a substantial body of research examining the economic and social implications of having different sizes of government. A 2014 book on this issue by Lakehead University economist Livio Di Matteo, for instance, found that economic growth in industrialized countries—including Canada—was maximized when government spending (and therefore taxation) was roughly 26 per cent of the economy. In other words, industrialized economies grew the strongest when governments limited their role in the economy to basically one-fourth of all economic activity. For context, current estimates are that Canadian government spending (at all levels) in 2018 will reach 40.0 per cent of the economy, or more than 50 per cent larger the optimal level for economic growth.

Government intervention is not, however, limited to trying to improve the economy but also targets a host of social goals such as literacy and life expectancy. Thankfully the same study also examined social progress across a host of measures. The analysis indicated that few gains are made in social progress when government spending reaches between 30 and roughly 35 per cent of the economy. Again, we’re now at 40.0 per cent of the economy.

Put simply, and based on the empirical evidence, there’s substantial room for government spending to be reduced without jeopardizing social progress while improving economic growth. Interestingly, improving economic growth is one of the current federal government’s principal goals. And yet, unfortunately, it has pursued economic growth in the exact opposite manner that research suggests by markedly expanding government spending and taxes.

For example, federal program spending, that is spending on actual programs and income transfers, is planned to reach $313.7 billion this year according to the most recent budget. That’s a 23.5 per cent increase since 2015 when the Liberals assumed power.

And when spending increases, taxes ultimately also must increase. A recent analysis, for instance, concluded that 92.2 per cent of all Canadian families will experience an increase in their federal taxes, with the average increase amounting to $2,218.

Interestingly, however, Canada recently experienced the benefits of smaller government from the Chretien Liberal era. The reforms enacted under the Chretien government, which we have coined the Chretien Consensus, led to a markedly smaller government sector. The reductions enacted by Chretien, coupled with reforms by provincial governments across the country of all political stripes, saw government spending reduced from 53 per cent of the economy in the early 1990s to under 40 per cent by the early 2000s.

And the economy boomed. Canada led the G7 as well as most OECD countries in economic growth, job creation and business investment during this period. In addition, the country’s poverty rates plummeted as did the unemployment rate.

Canadians will be well-served if the federal and provincial governments, as they finalize details for their upcoming budgets, consider both the research and our own recent experience with leaving more money in the pockets of Canadians to make decisions for themselves.

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