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The real story of government spending? Unprecedented discipline

Economist Stephen Gordon explains why the PM’s five-year plan held up—and why it’s so remarkable


 
Chris Wattie/Reuters

Chris Wattie/Reuters

There are any number of ways the government can—and did—tweak deficit numbers. But the real story of government spending during the past five years has been an unprecedented level of discipline.

The path to a balanced budget was set out five years ago. After posting a $55.6 billion deficit (about 3.5 per cent of GDP) in 2009-10, the government expected to bring that down to a $1.8 billion deficit in 2014-15. As it turns out, the 2015 budget reports a $2 billion deficit.

The $55.6-billion deficit could largely be explained by the recession and the fiscal stimulus package.

Even if the government had done nothing, “automatic stabilizers” would have created a deficit. Lower levels of income and spending during downturns generate lower tax revenues, and spending on income-support programs–notably employment insurance–increases. Most of the improvement in the budget balance during the past five years occurred automatically as the economy recovered and as the fiscal stimulus package was wound down.

Most, but not all. The two-percentage point reduction in the GST—the Conservatives’ signature policy change—reduced federal government revenues by about $12 billion per year by 2010. Not coincidentally, this reduction occurred at the same time as estimates for the “cyclically adjusted budget balance”—that is, after correcting for the effects of the recession—suggested a structural deficit of about $12 billion that would not go away when the effects of the recession did.

Since raising taxes was not an option the Conservatives were willing to consider, they focused on spending. And since they were still only a minority government in 2010, deep and immediate cuts would have been politically risky. So instead of attacking the deficit, the Conservatives settled in for a war of attrition. Instead of reducing spending in any given year, the government would keep spending growth below the growth of revenues.

The mechanics of this strategy were designed to minimize—as much as possible—political opposition:

  • Let transfer payments to individuals increase with GDP.
  • Let transfer payments to the provinces increase with GDP.
  • Hold direct program spending roughly constant.

In the absence of significant tax cuts—and there haven’t been any in the past five years—tax revenues grow more or less in line with GDP. By holding direct program spending constant, the government ensured that although expenditures would continue to increase, they would grow more slowly than revenues. So long as revenue growth outpaced that of spending, the deficit would be gradually whittled away.

This sort of plan is easy to devise, but difficult to sustain. Since the cost of delivering public services increase with inflation and population growth, holding spending constant means implementing real cuts to programs and employment.

Politicians usually prefer to deal with bad news all at once: a short, severe round of cuts followed by a declaration of victory and a return to “normal” spending patterns. (This was the strategy used during the Chrétien-Martin years.) Spreading the pain over five years runs the risk of provoking a backlash strong enough to force the government to back down.

So it’s quite remarkable to see how well the spending projections in the 2010 budget have held up.

The 2010 forecast for program expenditures in 2014-15 was $257.7 billion, which turned out to be one per cent above that actual outcome of $254.6 billion reported in the 2015.

Even more remarkably, the actual level of direct program spending—the budget item that was to bear the brunt of the Conservatives’ austerity program—also came in one per cent lower: $116.1 billion compared to the 2010 projection of $118.2. Five-year budget projections have traditionally been something of a joke over the years, but they have actually served as a very useful guide to predicting the spending patterns of Stephen Harper’s government.

Applying the same strategy year after year can generate a certain amount of momentum, but implementing meaningful change requires an investment of political capital. Simply allowing direct program spending to grow again with the economy would be enough to turn the small projected surpluses in the budget into large deficits.


 

The real story of government spending? Unprecedented discipline

  1. So long as revenue growth outpaced that of spending, the deficit would be gradually whittled away.

    That sounds suspiciously like “The commitment needs to be a commitment to grow the economy and the budget will balance itself.” And yet they mock Trudeau for saying it (largely by ignoring the first half of the statement).

    I guess in politics it’s not the plan itself that matters, but rather how you phrase it…

    • Excepting that the Justin was not talking about limiting spending. He was saying that he could spend freely and the budget would balance itself because of economic growth.

      Justin: If you exercise, you can eat whatever you want, and you will lose weight. (which is not true for 90% of the population.

      Stephen: If you exercise AND you modify your diet in reasonable ways, you will lose weight. (which is true for 90% of the population.

      Justin is a little bit like Kathleen…spend, spend, spend, spend. And now because the budget isn’t balancing itself, tax, tax, tax, tax, and sell off public assets to their crony bankster friends.

      • I have no love for Wynne or the way she (and McGuinty before her) have racked up debt. But the ghost of Mike Harris and giving us the choice of Wynne or Beetlejuice didn’t help the Conservatives come voting time. But that’s irrelevant to a discussion of federal politics and federal government spending.

        As to Trudeau – I think you’re putting words in his mouth (as opposed to your party’s usual practice of leaving out half the quote because the second half sounds silly – as long as you didn’t hear the first half).

        As to Harper: You’ll notice when talking about poor financial performance, he / Oliver skips over the Chretien / Martin years and goes all the way back to the 70s to make their case. That’s because they look like the rank amateurs they are, when compared to their immediate predecessors.

        Nearly every federal Conservative government of the last 100 years has left the country in worse financial shape than when they took office. Unless he sticks around long enough to pay off his past years of accumulated debt (which is highly unlikely) then Harper will continue that streak.

        One sort-of balanced budget (“sort of” because Oliver had to reduce the contingency fund by $2B, or 2/3rds, to pull it off) does not a financial superstar make.

        They mock Trudeau’s words because they know that, when it comes down to more than a superficial glance, their own record sucks. And so they want us looking elsewhere.

        • It wasn’t that the budget would balance itself. That’s quotation out of context and its aimed at people who don’t think but are good at repeating slogans. What he said was that the increased economic activity from increased infrastructure would lead to a sufficient increase in economic activity such that the budget could be balanced at a higher level of spending without increasing tax rates. It’s not a difficult argument to understand but it is one that people with simplistic views on the economy and budgets can’t seem to understand.

      • Actually, what he said was that we need to rebuild infrastructure (fact) and that building infrastructure will increase growth. Economists are arguing that the low cost of borrowing (less than 2 percent) makes it a losing proposition not to take advantage and invest in infrastructure when debt costs are low. Specifically, the cost of the infrastructure is less than the amount of economic activity that will be created in both the building and the use of the infrastructure.

        When I compare that to the government’s growth plan–stimulate the economy with family tax cuts now that their bet big on oil plan went bust, the CPC approach looks like the one borne of inexperience and a lack of understanding of the economy. Rather it is a strictly ideological approach that is known to lead to be significantly less efficient at stimulating growth.

        • China had the biggest infrastructure spending program in human history to fight the effects of the global economic crisis, and now it has effectively bankrupt local governments that are being bailed out Beijing with Chinese-style QE similar to the European ECB LTRO’s.

          Building a bunch of infrastructure (on borrowed money) doesn’t guarantee future revenue, even if your economy is growing at 7%,

          Spending on credit only brings future demand into the present. It should really only be done in the midst of a severe economic downturn. Otherwise you are just building into the economy unsustainable bubbles.

          If Ontario wants to build infrastructure, they can tax Ontarians. There is only one taxpayer.

          There is plenty of money for building stuff in Toronto and Vancouver. Just look at all the condos going up. There are ways to tax that to get money for transit and public housing without running to Ottawa. Ontario and BC and Toronto and Vancouver can tax the frothy speculation of their 1%’ers, banksters, and real estate speculators, and not Canada’s joe sixpack.

          • Spending on credit only brings future demand into the present.

            Especially when you also cut taxes and then force yourself to borrow as a result.

            You seem to be supportive when Harper does it, and disparaging when others propose similar actions. Why is that?

            At some point, someone is going to have to pay down Harper’s debt. Harper hasn’t cut taxes; he’s just deferred them. And what, really, have we to show for that debt? A much-diminished nation, on so many levels.

  2. Did this Gordon dude, did he actually go to school? I mean he does know how to tie his shoes and stuff like that, right?

    Harper has added $160 BILLION of debt to this countries balance sheets.

    What is even more surprising that a national magazine like this would publish such garbage.

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