Economic dreams and reality

Posted on March 9, 2011 in Governance Debates

Source: — Authors: – opinion/editorialopinion
Published On Tue Mar 08 2011.   Don Drummond

I have a dream about the 2011 federal budget to be issued on March 22. Yes, this is the sort of thing practitioners of the “dismal science” dream of.

My dream budget sets out a transparent and credible plan to rebalance Canada’s finances. It details how the forthcoming era of spending restraint will affect each program. The decisions are based on the merits of each program, rejecting the classic across-the-board approach. The dream budget then tackles our most pressing economic and fiscal challenges. It recognizes and respects political realities, including federal-provincial jurisdictional issues, but it refuses to accept these realities as reason for policy paralysis.

My dream budget continues to target 2015-16 for the return to a balanced budget. The distinction from the government’s fall 2010 economic update is that it acknowledges more clearly that this will require a fair degree of spending restraint. Total program spending cannot grow faster than 2 per cent a year, or zero growth after taking out inflation. As the major transfer programs to seniors and provinces will grow much faster than 2 per cent, other spending must be flatlined or decline by a significant margin each year in real terms.

This isn’t the bitter medicine of mid-1990s restraint, but it will be tough to swallow nonetheless. The dream budget recognizes that it is not politically feasible to have no new spending or tax relief measures over five years, so it cuts existing spending even further to create a policy reserve.

The budget acknowledges that health care is Canadians’ top priority. But it explains that the era of financing runaway cost increases must end. After 2013-14, the provinces cannot expect the federal Canada Health Transfer to grow faster than 4 per cent annually. But the federal government makes an offer to work with all provinces on underlying reforms that will drive up efficiency while not jeopardizing quality.

The budget of my dream explains that education cannot again be collateral damage in a war on the deficit. So the 3 per cent annual growth in the Canada Social Transfer will be maintained after 2013-14. It would put a clear emphasis on giving access to post-secondary education to students who do not typically attend. The budget acknowledges the deplorable state of education on First Nations reserves and commits to thorough reforms backed by necessary funding.

The budget of my dream makes clear that Canada’s Number 1 economic challenge is its lacklustre growth in productivity. If that doesn’t improve, we will be doomed to mediocre growth, stagnant real wages and difficulty financing cherished public programs. The budget will be honest in admitting that the productivity malaise is a bit of a mystery because governments in Canada have done a lot of the right things but so far we have not seen the anticipated private sector response. The budget will commit to working with business and workers to better understand the problem and reshape programs.

The budget of my dream will tackle imbalances in the labour market, where many employers scream about skilled worker shortages, the unemployment rate remains high and certain groups, such as aboriginals and recent immigrants, are far from fully engaged. The government will commit to building a state-of-the art labour market information system so we’ll know as much about job vacancies as we now know about unemployment.

The dream budget will acknowledge public angst over retirement savings and explain how the recent proposal for Pooled Registered Pension Plans will be an important addition to savings vehicles. But it will admit this doesn’t address all the problems and will indicate an openness to further reform, including an expansion of the Canada Pension Plan.

The dream budget will acknowledge that current policies will not allow the country to come close to the government’s greenhouse gas emissions target for 2020. It will set out a plan to rectify this while ensuring minimal economic damage.

Will the dream be realized? Not likely. The fiscal plan probably won’t provide much detail on how spending will be restrained. The Parliamentary Budget Officer will probably claim the balanced budget projection is off by $10 billion. But consider that a mere half percentage point error in the revenue growth rate for five years throws off the budget projection by $7.5 billion. Add in a similar but compounding error in the spending growth rate and you’ve got a $15 billion error.

The budget won’t likely talk about most of the pressing national economic and social challenges. The opposition will claim these errors of omission are cause for lack of confidence in the government. But their arguments will be transparently political and the debate mostly a nightmare.

I plan to set my alarm for when the government begins reporting on some of the processes it has recently announced. Like how to better promote innovation, how to recalibrate immigration selection criteria and the review of First Nations education. These, rather than the budget, will be cause to wake up and pay attention to policy.

Don Drummond is Matthews Fellow and distinguished visiting scholar in the School of Policy Studies at Queen’s University.

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