The Conservatives don't mind big government if it's cheap -

The Conservatives don’t mind big government if it’s cheap

Stephen Gordon on doing damage the cost-effect way


Adrian Wyld/CP

If asked, the Conservatives will tell you that they favour a smaller government that intervenes sparingly in the functioning of the market, and it’s been pretty well-established that a medium- and long-term goal of the Conservative government has been to reduce the share of Canadian GDP that is taxed and spent by the federal government. But lower taxes and lower levels of spending are not the same thing as a smaller government.

Here are the highlights (sic) of the “Strengthening the Competitiveness of the Manufacturing Sector” section of  Chapter 3.2 of the budget plan:

  • $1.4 billion in tax relief for Canada’s manufacturing and processing sector over the 2014-15 to 2017-18 period through a two-year extension of the temporary accelerated capital cost allowance for new investment in machinery and equipment. What is the problem this measure is supposed to solve? Capital consumption allowances make sense in themselves, so long as they are aligned with economic capital depreciation rates. But accelerated CCAs introduce distortions into the tax system, and introducing them only for one sector amounts to diverting capital away from where the market would send it to where the government wants it to go.
  • $920 million to renew the Federal Economic Development Agency for Southern Ontario (FedDev Ontario) for five years, starting on April 1, 2014. Seriously? A slush fund economic development agency for Southern Ontario? 
  • $200 million for a new Advanced Manufacturing Fund in Ontario for five years, starting on April 1, 2014, funded from the renewed FedDev Ontario. More pork to be distributed to firms that enjoy the favour of the government.
  • Building on the success of the National Shipbuilding Procurement Strategy, the Government will better ensure that purchases of military equipment create economic opportunities for Canadians by developing key domestic industrial capabilities to help guide procurement, by promoting export opportunities, and by reforming the current procurement process to improve outcomes. The Conservatives can’t even be bothered to sustain the fiction that government procurement should be aimed at obtaining the best value for the taxpayer. Public money is to be spent where politicians want to see public money being spent.
  • Providing stable funding of close to $1 billion over five years for the permanent Strategic Aerospace and Defence Initiative, as well as providing $110 million over four years, beginning in 2014-15, and $55 million annually thereafter, for the creation of an Aerospace Technology Demonstration Program. Another example of the government providing cash to a favoured sector. (Bonus points for gratuitous use of the word “strategic.”)
  • $92 million over two years starting in 2014-15 to continue support for forestry innovation and market development. Because if you’ve gone this far, what possible reason could you have not to throw money around at random?

And on and on the budget goes, for page after mind-numbingly interventionist page. How is this small government?

One response might be that the spending involved is tiny, which is true enough. But the Conservative focus on government spending is misplaced as far as promoting economic growth goes. In his survey (pdf) of the empirical evidence on the determinants of economic growth, Columbia University economist Xavier Sala i Martin — one of the leading researchers in the field — concluded that:

The size of the government does not appear to matter much. What is important is the “quality of government” (governments that produce hyperinflations, distortions in foreign exchange markets, extreme deficits, inefficient bureaucracies, etc., are governments that are detrimental to an economy).

This emphasis on the quality of government — and not its size — is a crucial:

Institutions (such as free markets, property rights and the rule of law) are important for growth.

You don’t need a big government to interfere with markets, or to weaken property rights and the rule of law. The decision to forbid shareholders of Potash Corp from selling their holdings to BHP Billiton didn’t cost the federal government a dime. Nor did instructing banks to not offer lower mortgage rates. And then there’s the example of the government’s preference for the clumsy and heavy hand of regulation over more efficient, market-based approaches to reducing greenhouse gas emissions.

I don’t think it’s quite correct to say that the Conservatives want a smaller government. They seem happy to run a government that is as big and dumb as its predecessors — so long as it’s cheap.