Next prime minister should cut spending to help the poor
For a government budget or election platform to make economic sense, the amount of spending should be meagre. Milton Friedman’s observation, that “nobody spends somebody else’s money as carefully as he spends his own,” remains timeless. Government planner Smith won’t spend Jones’ money on Brown more effectively than Jones and Brown would spend their own money on themselves, so transferring spending decisions from private individuals to the government is generally deleterious.
Where there’s market failure, exceptions may arise. National defence, for example, is a public good because it’s not feasible to provide it only to those who voluntarily pay for it. Left to the market, everybody might hope to freeride off the contributions of others. But even though everybody would benefit from having national defence, nobody would pay for it, so the government must step in to force contributions through taxes.
There’s no magic number as to what proportion of the economy is affected by market failures, or how much the government should spend, but studies generally find that the optimal level of government spending in developed countries is somewhere between 15 per cent and 30 per cent of GDP (indeed, a study by economist Livio Di Matteo estimated that economic growth is maximized when government spending is about 26 per cent of GDP).
Meanwhile, in Canada, total spending by the federal, provincial and municipal governments amounted to nearly half of GDP before the pandemic, and this year will likely amount to slightly more than half of GDP. Therefore, a very rough estimate would be that total government spending in Canada should be cut approximately in half to generate the best economic outcomes.
In the election platforms of Canada’s three main political parties, we unfortunately see no such halving. On the contrary, they instead take existing spending as a baseline and pile on billions, or tens of billions, of dollars in new annual spending with nothing material in the way of offsetting cuts. Alas, economically sensible policies, and what politicians put in their platforms to get elected, don’t overlap much.
Politicians might try to justify some of their policies by admitting that while they might in some cases reduce economic growth, they at least reduce poverty by taking from the rich and spending on the poor—perhaps a permissible explanation to some minor extent, but generally false. Experience shows that a rising tide generally lifts all boats, so the richest countries with the highest rates of past economic growth have the least poverty today. The most effective way to reduce poverty is through economic growth.
Moreover, when you look at most new or proposed government programs, it’s difficult to make the case that the adverse effects on economic growth are in any material way compensated by poverty reduction. When governments redistribute income—even when the intended recipients are “disadvantaged”—the money often goes to groups of people who have the most political power (and so are best-equipped to get their hands on public money) as opposed to the actual poor. In fact, many of the proposed programs (increased funding for health care, paid sick leave, etc.) are universal, which means they’re not means-tested, which means the income levels of the recipients are not a factor.
To achieve better economic outcomes for everybody, including the poor, economic growth must go up and government spending must come down. It’s therefore unfortunate that none of Canada’s three main political parties propose to cut government spending.