The Chopping Block: Canadians deserve more

NationalPost.com – opinion/financialpost.com – Monday’s Conservative budget should cut spending as radically as Paul Martin planned in 1995. This is the first in a new Chopping Block series dealing with Ottawa’s planned spending review. It includes a column Friday by Financial Post Editor Terence Corcoran.
Jun 2, 2011.   By Niels Veldhuis and Milagros Palacios

All expectations for next week’s federal budget are that it will look much like the March version — one that included a substantial $30-billion deficit this year (2011-12) and no credible plan to return to a balanced budget.

Canadians deserve more.

The newly minted Conservative majority should seize the opportunity to put forth a truly conservative plan to balance the budget — one that puts federal departmental spending on the chopping block.

In the March budget, the Conservatives proposed balancing the budget in five years (by 2015-16). To get there, the government pinned its hopes on revenue growing at a robust average rate of 5.6% over the next five years, while holding program spending increases to an average rate of 1.6%.

There are good reasons why Canadians should doubt this plan.

The same approach failed in the 1980s and early 1990s, when successive federal governments attempted to balance the budget by trying to slow the growth in spending while hoping for higher revenue. And there’s nothing in the current Conservative government’s track record to suggest it is capable of keeping a lid on spending increases. Even before the financial crisis and its massive fiscal stimulus package, the Conservative government increased spending at an average rate of 5.5%.

During the recent election, the Conservatives pledged to be more fiscally conservative by promising to balance the budget a year earlier, 2014-15 instead of 2015-16. Extra budget savings would be generated by the government’s Strategic and Operating Review, a one-year review of program spending — excluding transfers to individuals and governments — that was designed to “realize substantial additional savings through greater efficiency and effectiveness.” (Emphasis added.)

From 2012-13 to 2014-15, the government plans to find $7-billion in efficiencies, including $1-billion in 2012-13, $2-billion in 2013-14 and $4-billion in 2014-15. While the government claims these savings are “substantial,” they amount to a mere 2% in savings from the $352.5-billion in departmental spending planned from 2012-13 to 2014-15. The Conservatives also promised an extra $4.6-billion in new spending during the election, which wipes out most of the savings.

With a significant deficit and no credible plan to balance the budget, this is not the time for marginal belt-tightening. Canada needs real and substantial spending reductions that either significantly cut programs or eliminate them entirely.

To decide which programs to cut and/or eliminate, the Conservatives should look back to the 1990s at the then-Liberal government’s review of program spending. The Liberals balanced the budget in part by cutting transfers to provinces and they also made substantial reductions to departmental spending.

Specifically, the 1995 budget called for direct program spending cuts of $9.8-billion or 19% over a three-year period, 1994-95 to 1997-98. These reductions were largely the result of the Liberals’ Program Review — a comprehensive examination of federal departmental spending. The review required ministers in each department to evaluate their programs using six tests: (1) serving the public interest (2) necessity of government involvement (3) appropriate federal role (4) scope for public sector/private sector partnerships (5) scope for increased efficiency, and (6) affordability.

As a result of these tests, the Program Review led to a significant structural change in the federal government’s involvement in the Canadian economy, including a reduction in the federal government’s involvement in the business sector, through a proposed 60% cut in business subsidies.

As the table above shows, the cuts proposed through the Program Review were substantial: Spending on transportation was to decrease by 51% from 1994-95 to 1997-98; natural resource sector spending by 31%; Industrial, Regional and Scientific-Technological Support Programs by 38%; and Heritage and Cultural Programs by 23%. In fact, all departments outside of Justice and Social Programs were set to be reduced by more than 10%.

All the reductions in departmental spending proposed through the Program Review did not come to fruition. But the Liberals ended up reducing departmental spending by $6.3-billion (12%) from 1994-95 to 1996-97.

These meaningful reductions in departmental spending, aided by reductions in transfers to provincial governments and fairly stable revenues, meant that it took only three years for the federal government to balance its budget.

If the Conservatives enacted a similar 12% reduction in departmental spending, they would find $14-billion in savings by 2013-14 — $11-billion more than what they’re proposing through their Strategic and Operating Review.

Canadians need a credible plan to balance the budget. Unfortunately, the Conservatives’ current plan is not it. Putting departmental spending under the microscope would produce substantial savings to help balance the budget. It’s an approach conservatives cheered in the 1990s. It worked then and can again.

Financial Post
Niels Veldhuis and Milagros Palacios are economists with the Fraser Institute and co-authors of Budget Blueprint: How Lessons from Canada’s 1995 Budget Can Be ­Applied Today, available at www.fraserinstitute.org

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