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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.


 

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