Note to Stephen Harper: It’s not so easy cutting federal spending -

Note to Stephen Harper: It’s not so easy cutting federal spending

The PM promises reductions, experts ask, Where?


Note to Stephen Harper:Federal spending cuts are coming. Prime Minister Stephen Harper promises them. Finance Minister Jim Flaherty is to map out the strategy—though maybe not many specifics—in his March 4 budget. Stockwell Day, in his new job as Treasury Board President, is supposed to stare down any bureaucratic resistance.

But where will the Conservatives cut? Start anyplace, a jaded taxpayer might say. After all, federal governments haven’t exactly looked frugal in recent times. Even before last year’s massive deficit-financed stimulus injection to fight the recession, spending rose more than four per cent a year, under both Liberals and Tories, in six consecutive budgets.

Yet the notion that layers of glistening blubber are just waiting to be hacked off is only a comforting delusion. There must be fat, sure, but the federal books are well marbled—the less-than-unassailable spending tends to be finely integrated into essential programs. No use pretending that finding savings huge enough on their own to balance the books again is merely a matter of will.

In fact, some of those most experienced on the subject think the task impossible. Start with two key architects of the famously successful deficit-slaying strategy overseen by Paul Martin when he was finance minister: Scott Clark, who was Martin’s deputy minister from 1997-2000, and Peter DeVries, the department’s fiscal policy director from 1990-2005.

Now retired from Finance, Clark and DeVries shared with Maclean’s a draft version of budget analysis they recently co-wrote. In it they offer trenchant observations on everything from fiscal projections (“One certain thing about a medium-term deficit forecast is that it will be wrong…”) to the hot-button issue of appropriate tax levels (“…a credible budget will require that taxes be raised.”).

Where to cut, however, is the most pressing issue of the moment. But first, how much? Their starting point is that the Parliamentary Budget Officer is not far off when he estimates the structural deficit—how deeply Ottawa will remain in the red after the stimulus gush is spent and the economy is reasonably healthy again—at about $20 billion.

So $20 billion at least must be reduced from spending, assuming Harper and Flaherty mean it when they vow not to hike taxes. Overall program expenses run about $208 billion. But $108 billion of that is transferred to provinces and individuals, and the Tories promise not to significantly cut those payments. That leaves $100 billion to be sliced by a fifth.

And that might seem, while pretty tough, within the realm of the possible. Except in the real world the whole $100 billion is not on the butcher block, as the chart at the bottom from Clark and DeVries shows.

They point out that fully $18 billion pretty much can’t be touched. That includes, for example, more than $2 billion spent by Canada Mortgage and Housing, money which is subject to long-term agreements, and more than $3 billion in federal payments Ottawa must make to Newfoundland and Nova Scotia under offshore energy deals.

Which still leaves more than $80 billion to shrink by a quarter. However, Clark and DeVries subtract another $35 billion as “sensitive”—programs like Defence, First Nations, and student assistance. Armchair fiscal disciplinarians will scan down this portion of their table and exclaim, “Aha! These aren’t areas that truly can’t be cut, they’re just sacred cows.”

And there’s something to that. But at the very least the “sensitive” list reminds us that wide swaths of spending can’t be seriously cut without inflicting real damage. Canada still lags in R & D—so do we really want to whack research? In the post-Haitian earthquake era, and with our solemn commitments to Afghanistan and Africa, would we really contemplate deep foreign aid cuts? Does anyone believe we spend too much on the homeless?

So what’s left as the prime base for restraint? Clark and DeVries tally up only about $47 billion. Not even the most hard-nosed government is going to whack $20 billion from that total. Based on their experience of the program review imposed by the Liberals in 1994 to find savings, the two former mandarins suggest a five-per-cent reduction, or about $2.5 billion, is more reasonable.

Five per cent might sound like a pittance. After all, back in his landmark 1995 and 1996 budgets, Martin mapped out a fiscal austerity program that set a target of 22 per cent less spending across all federal departments by 1998-99 than in 1994-95. But that (and here I’m making my own observations rather than following Clark and DeVries) never happened. Instead, program spending declined six per cent in the key 1995-1999 period. So how did the Liberals balance the books? The answer: tax revenues soared by 26 per cent in those five years, thanks to steady, strong economic growth.

Growth of that sort, however, is not in anyone’s mainstream forecast for the next few years, so the Tories can’t credibly hope the fiscal problem will be solved that way again. That leaves the solution Clark and DeVries arrive at: increase taxes. More on that in a future posting.

Program Expenses ($ millions) 2008-2009
September 2009 Update 207, 857
Major transfers to persons 61,586
Major transfers to other levels of government 46,515
Total 108,101
Potential Base for Cuts 99,756
Exclusions from Base
Atlantic Offshore Revenue Accounts 3,485
Allowance for bad debts 3,284
Crown corporations: Third party revenues 2,034
Canada Mortgage and Housing Corporation 2,207
EI Administration costs 1,639
Amoritization of non-defence capital 1,575
Community, contract & aboriginal policing 1,395
Agriculture: Business Risk Management 1,138
Canadian Air Transport Security Authority 477
Canada Millennium Scholarship Foundation 356
Children’s special allowance payments 220
Payments under the Softwood Lumber Products Exports Charge Act 181
Canada Foundation for Innovation 78
Total 18,067
Adjusted Base 81,689
“Sensitive” Program Expenses
Defence 18,770
First Nations and Inuit programs 7,290
International assistance 3,169
Research agencies 3,007
Infrastructure programs 1,255
Labour market 1,129
Student assistance 423
Homelessness 118
Total 35,162
Potential Base for Cuts 46,527
Of which:
Personnel costs 26,768
Other 19,759

Source: Public Accounts of Canada 2009


Note to Stephen Harper: It’s not so easy cutting federal spending

  1. "but the federal books are well marbled"


    is a BRILLIANT line. cheers.

    • I second this praise. You've made a great contribution to a tired metaphor, Mr Geddes!

  2. "Detailed analysis of 2006 Census findings on full-time earnings by sector and occupation show that government and public sector employees are paid roughly 8 to 17 per cent more than similarly employed individuals in the private sector. In addition, taking into account significantly higher paid benefits and shorter workweeks, the public sector total compensation advantage balloons past 30 per cent. Expressed in dollar terms, public sector employers have a combined wage and benefits bill that is $19 billion higher than if they had kept costs to private sector norms." CFIB, Dec '08

    I can think of one place where Feds could start: pay public servants what they would receive for doing same job in private sector. No one ever explains why public servants should receive 30% more in salary and benefits than what same job in private sector pays.

    • Because otherwise they'll move to the private sector, and we need top people in our civil service.

      You pay peanuts, you get monkeys.

      • They won't move to the private sector if they're paid the same, and they're not, they're paid more in the public sector.

      • Thats the same line of defense that Wall St bankers are using RIGHT NOW to sucker the American taxpayer for billions of dollars. And it's proven time and time again to be hogwash.

    • Agreed on that. And/or, let public sector pensions (including those for MPs) be whatever-they-call-it when your private company goes belly-up and pensioners are told, "oops! Sorry. Nothing there for you anymore." Of course I don't really want public sector employees to lose their pensions, I just wonder why pensions, sick-days, group health plans, etc. are never taken into consideration as part of the "remuneration" teachers and others are so ill-remunerated of. Okay, that's a pet peeve that I may not be completely rational about (emotions trump intellect).

      The only other thing I can see open to cuts is infrastructure, because surely the Conservative government has spent wisely with the infrastructure payments it has given out over the past year.

      • Sure doesn't sound like the CFIB, does it ?

      • That'd be bankruptcy. You're advocating putting the Canadian government into bankruptcy to get out of it's pension obligations.

        Probably not the road we want to travel.

    • Right

      Like there's so many doctors, nurses, firefighters, police and health inspectors in the private sector to compare salaries with.

      You're quoting a rag.

      • Soldiers


        border guards

        stuff the Fascists only WISHED were privatized.

    • Hopefully you aren't talking about some type of pay equity scheme.

    • Why not cite this paper from Treasury Board referenced in the CFIB analysis linked below? The point is, the feds admit their data is incomplete, so how valid can any analysis using their data really be?

      [… ]

    • The "Detailed analysis" takes ALL public sector employees as an average… First, comparators are not easy to find for many positions. Second, the values are skewed upwards by what I could call 'obscene' high salaries paid to upper management, relative to the figures paid out to front-line workers. This also translates into the Pension areas, where the government is likely going to try and reduce pensions to their lowest-paid workers yet not touch the 'gold-plated' bloated plans that MP's and senior bureaucrats receive.

      During the 1994 cuts, many upper management people in the federal public service received 'performance' bonuses based on how much they could cut from their department's salary costs. If they saved perhaps $200,000 per year by laying off 5 front-line workers, they might receive an extra $50,000 for themselves (just an example). I say that any cuts should start at the TOP – with MP's and Senators taking at least as large a percentage cut as they want workers to take.

      A 10 % cut on 150,000 is $15,000, while the same cut on a clerk's wages would amount to about $4000. Any cuts should also be implemented across the board on the benefits, tax-free allowances, and expense allowances.

      Now, do you think the MP's will vote to cut their own wages first?

      • A referendum question I could get behind:

        Should a bank executive be paid more than a firefighter?

        • Would you trust a firefighter to get the most amount of interest on your retirement savings fund ?

          If the answer is no then your question answers itself.

        • Are we in a burning building at the time of the referendum?

  3. Great analysis, John! Given that spending cuts alone won't be enough to balance the books, and both the Conservatives and the Liberals aren't prepared to raise taxes (at least not until one of them wins a majority), it looks like we'll have to put up with a structural deficit for the next five years or so and wait for a period of strong economic growth to balance the books for us. It's the Canadian way.

    • In other words, drift, and hope we get lucky.

      Where will this 'strong economic growth' come from?

      • In other words, drift, and hope we get lucky.


        Where will this 'strong economic growth' come from?

        Rising commodity prices and a global economic recovery within the next 3 – 7 years. (Hopefully.)

        • free trade deals with the EU and India?

          • Free trade with everybody, starting with the EU and BRIC…plus the biggie, the Knowledge Economy.

          • I'm totally not sold on this whole "Knowledge Economy" thing, and I suspect it's wishful thinking. If we're talking about tech industries which require things like engineering and computer science skills then I really don't see how we benefit from this supposed paradigm shift and what our comparative advantage is.

            Basically, design and programming aren't limited by location. Some highly skilled and educated person in India or China could do exactly the same work and send it to anywhere in the world. While we might have a bit of an advantage now in terms of people who can do these kinds of things, I'm thinking it won't be too long before countries like India are the real "Knowledge Economy" powerhouses (more engineers etc means lower labour costs, meaning more people choose Indian companies, meaning they get more experience and generally get better etc etc until they're top tier).

            I could be wrong, but there's absolutely nothing wrong with resources or manufacturing to serve the US economy as far as I'm concerned, since those are things we've got an inherent advantage in due to our geography. Tech, well, it'd be wonderful if we were a tech leader, but don't bet on it saving us going forward…

          • I'm sure those will help. We should certainly be reducing our dependence on the American economy.

          • Absolutely. Dumb to have put all our eggs in one basket in the first place.

      • It's pretty much how Trudeau got in hot water…fiscally that is.

    • It's the Canadian way…slag or compliment?

      • Slag. But it's an optimistic slag.

        • Optimistic slag, I like that :) I'll definitely try that with my boss and/or co-workers!

          Do you lean towards harder cuts or modest tax increases to close the gap, or both? I would support modest tax increases, and would at least consider harder cuts, dependent on the target(s).

          • I'm with you, Phil. I don't have a problem with modest tax increases, provided they're temporary and would be reversed a few years down the road. However, I don't think that tax increases of any sort are politically feasible in the minority quagmire that we seem to be stuck in.

            As a fiscal conservative, I prefer to cut spending and curb growth in future spending, but as you say it depends on the targets. I think soft cuts across the board are the best approach (e.g. using a scalpel instead of a chainsaw).

          • Putting the GST back up to 7% would more or less do it, and we'll get to keep the substantial corporate cuts introduced by the Harper government. You fiscal conservatives insist that taxes should only ever decrease. Even after restoring the GST, federal taxes will be much lower than they were a few years ago. Restoring the GST won't cause much economic harm, either.

            As it is, we are underspending in many areas. Our infrastructure deficit is enormous and growing. Health care spending will rise substantially as we care for the boomers. Tax will have to rise, permanently. To pretend otherwise is a fantasy.

          • I'm OK with restoring the GST to 7%.

          • Me too. Dropping it was idiotic.

          • Idiotic from a policy perspective, but clever from a political perspective, at least so far. And ultimately I don't believe that Harper is an idiot, not even close, so I can only assume that Harper chose good politics over good policy. And the part that makes it somewhat more confusing for me is that he really didn't have to cut the GST – at least I didn't see it to be a burning issue amongst the base.

  4. They say they wont cut transfers to provinces. That doesn't mean they wont slow the rate of increase.

    The simple fact of federal spending is that it's payoffs to the provinces that create deficits, and that's where the solution must be.

    • Slowing the rate of increase does nothing to trim the budget. Hint, the key word there is "increase"
      Even eliminating any increase altogether still does nothing to trim the budget. It just doesn't make it get any worse.

      • Actually we usually have 2% inflation, except for this year of course. So slowing the rate of increase to close to zero IS a cut.

  5. This analysis is pretty weak because it is so short-term. You can cut 20 billion in one year, sure. Or you can cut less than that – say 5 billion, while REDUCING GROWTH IN FUTURE SPENDING. The reason we are in this largely because of breakaway spending. This is why having a fiscal hawk like Day in national revenue is important. You need a guy with the gravitas and instincts to say no to new spending.

    Martin's own strategy was one of backloading. Martin made cuts that were insufficient to plug the deficit hole, but big enough to convince investors that Canada was serious about deficit reduction. Investment surged, and above expected economic growth drove up revenues as Canada started looking like a much better business prospect. A little vinegar can go a long way.

    • Day spent his way thru Alberta. He was never any 'fiscal hawk.' This is solely a political move, Harper just handed him a hot potato.

      • You're an Albertan ? Or are you just repeating talking points.

        From what i've heard he cut the public service when he was there. Very fiscal hawk like.

    • The analysis is pretty weak…these are the guys who fought the last debt monster. Basically Martin's govt had some luck …you so sure it'll happen again?

      • It wasn't just luck. The growth of the 90's was related to Canada putting its fiscal house in order.

        • I think the massive growth in the US from the dotcom bubble had a lot to do with the growth in the 90's. Don't get me wrong, I think that fiscal restraint was key in avoiding the 2001 recession and resulted in a host of other social and economic benefits, but debt reduction primarily has long-term benefits, not short-term. I don't think it was significant to the incredible 90's growth.

          Besides, the chances of it coming back are slim. The US and Europe are both looking at long, mediocre recoveries, rather than the boomers entering their productivity prime, they'll be retiring, and debt on all other levels (provincial, municipal and household) is higher than it was in the early 90s. Fiscal restraint is important, but with or without it, 90's style growth isn't coming back any time soon.

          • "but debt reduction primarily has long-term benefits, not short-term. I don't think it was significant to the incredible 90's growth"

            I agree with one caveat. Investment is based on rational expectations as well as present realities. When expectations of future growth improve considerably, it helps drive investment in the present (a self-fulfilling prophesy). The prosperous 90's were driven in a very big way by massive increases in foreign direct investment.

            FDI in Canada, 1994: 8 billion
            FDI in Canada, 2000: 67 billion

            Investment in machinery and capital increased considerably as a share of GDP as the outlook for long-term oriented investment improved.
            1994: 5.9% of GDP
            2000: 7.4% of GDP

            Deficit reduction, thus, can spur growth under the right circumstances.

          • Oh, I certainly agree that deficit reduction can spur growth. However, I think there's a bit of a time lag – by 2000, deficit reduction had already been largely accomplished. During the major restrictions, GDP growth dipped significantly. Deficit reduction is an investment, with medium- and long-term benefits, but net short-term losses – any increased investment based on future expectations will be more than offset by immediate losses to the economy due to reduced spending or increased taxation.

            Also, much of that investment had to do with rising oil prices, which peaked around 2000. The expectation that the Canadian economy would remain strong because of its fiscal responsibility contributed of course, but by that point the expectation that oil would continue to become more valuable would be the major driver.

          • 1.The issue isn't whether Harper can eliminate the deficit today. He can't. The issue is whether it can be eliminated over the medium/long term. A short term temporary deficit is not a problem, after all. Insofar as deficit reduction is good for growth over the medium/long term it is a good strategy for medium/long term deficit reduction.
            2. You are wrong about oil prices. They were at historic lows in the 90's, and had just barely begun to rise in 2000.
            3. Yes, there may be short term consequences to reducing spending. However, when somebody's lifestyle or livelihood requires the the government run long term deficits, then it is not sustainable. In the best example we have, by the way, there were no major short term costs to deficit reduction. Despite deep cuts, economic growth was high in 1995.
            4. Spending restraint may be even less harmful than cuts. If program spending and transfers to the provinces were to converge to a level consistent with a 2%/annum increase from 2008/09 levels, the budget would have about a 6.8 billion dollar surplus by 2013 (according to Kevin Page's numbers).

          • Debt reduction and foriegn investment both increase the dollar as well (eventually equillibrium is reached when our assets aren't cheap anymore).

            Unfortunately this phenomena also speeds up the gradual loss of export jobs and the hollowing out of Ontario.

          • 1. Of course he can't, and I don't expect him to. However, we're not talking a short term temporary deficit when it's still large 5+ years from now, because these things are cyclical and on average, 5 years is halfway to the next deficit-inducing recession. Past 2011, when the stimulus spending cuts off, I see little reason to be running deficits.

            2. No, I'm not. See that little blip there – oil prices had been rising steadily for well over a year by that point. No, they weren't at 1980's oil crisis prices, but they were increasing, with renewed interest in the oil sands.… – note that it represented the first major increase in oil prices since late-1990. Note that I say rising oil prices, not high oil prices – investment is driven by expectation of return on investment (continued rising oil prices), not on the absolute value at the time.

            3. I agree wholeheartedly with the generalities in this part, but not with the specifics. Real GDP growth between 1994 and 2000 has only two years below 4%, 1995 and 1996, which were both below 3%. There were major short-term costs to deficit reduction, because while growth in 1995 was still fine, it was significantly lower than it could have been. Deficit reduction takes money out of the economy to pay down stable debt, it is going to have a notable impact. The question is always whether that impact is manageable (as it was in 1995-96), and whether the longer-term benefits outweigh the short-term losses, which I think we agree they usually are.

            4. I'd agree, if spending restraint was a simple as just not ok'ing new spending initiatives, but as I've tried to indicate, it's not as simple as that. Effectively, spending restraints are cuts when there is an absence of new spending programs, because you're reducing the original breadth of established programs. It's two halves to the same hole and it just leads back to the same conundrum presented above – where are you going to restrain growth and how?

          • Perhaps the Gulf War influenced the oil spike?

    • The $20 billion future deficit assumes no new major spending initiatives. That 4%+ growth in spending over the last few years came from relatively natural growth in the cost of existing programs – off the top of my head, I can't think of any major spending increases the Conservatives have initiated. Plenty of cuts that would reduce revenue, but that's the other side of the deficit issue.

      Toss in the beginning of the boomer retirement wave, the continued reduction of corporate taxes over the next couple of years and the fact that many areas (Research, Defense) are currently somewhat underfunded relative to other major industrialized countries, and we're left with a situation in which it's worth making a real effort to find intelligent ways to cut spending and preventing spending growth, but doing so won't be enough.

      • 1. Real government spending increased at a rate of 0.8%/year in real terms from 1985-2002, versus over 3% from 2002-2009 (add 2% to each number, roughly, to get the nominal figures).
        2. Kevin Page assumes that program spending in 2013/14, where the structural deficit is 19 billion, will be 122.1 billion dollars – versus 99.8 billion in 2008/09. That corresponds with a 4% per annum increase. Decreasing that rate of growth to 2% would do most of the work of balancing the budget.
        3. Canada does not underfund research. Once again you are expressing an opinion without basing it in empirical evidence.
        OECD rankings by investment in knowledge as a % of GDP:
        1. United States
        2. Israel 
        3. Sweden
        4. Finland
        5. Denmark
        6. Japan
        7. Canada
        8. France
        9. Australia
        10. Germany
        11. Netherlands
        12. United Kingdom
        13. Austria
        14. Belgium
        15. Spain
        16. Slovenia
        17. Italy
        18. Ireland
        19. Estonia 
        20. Greece
        21. Portugal

        I agree that the military is underfunded.

        • 1. Take out the 1995-1999 period from the 1985-2002 period. I don't have the numbers you're using, but from some quick calculations using the 6% total drop cited above and assuming constant 2% spending, real growth in government spending was about 2.5% from 1985-2002, not counting that five year 1995-1999 span. I maintain that 4% nominal growth is typical in the modern era without new major spending initiatives, with the expected incoming extra cost of an aging population taking the place of the relatively minor specific spending increases undertaken since 1985.

          2. Yes, decreasing growth to 2% would be effective. However, much of the increase has already occurred – the government itself has expected program expenses to about about $120 billion THIS fiscal year, staying relatively constant until 2013-2014. Now that's pretty reasonable since stimulus spending falls off over that time, but my point here is that it's not as simple as comparing the 2008 numbers to the 2013 projections without considering the little elements.

          Besides, limiting that growth to 2% still leaves a $7 billion shortfall, which is better, for sure, but not insignificant.

          There's also the big elephant left in the room – how do you get it down to 2%? To put things in perspective, if instead we slash the 08-09 budget so that 4% growth from that achieves the same result in 13-14 that no slashes but 2% growth would, we would need to cut about $10 billion, four times what Clark and DeVries say is feasible. Where's that coming out of?

          3. Fair enough – I still think research is underfunded, but you're right in saying that we don't underfund it in comparison to other modern countries. We don't exactly overfund it either, especially with our poor investment in R&D in the private sector, so at a sheer minimum, I don't consider it a viable place to make cuts without medium- and long-term damage to the economy.

      • Natural growth would be more like the rate of inflation, which is supposed to be 2%.

        The biggest expense was and continues to be rebuilding the military. A lot of that could easily be delayed if nessecary, especially with the Afghan pull out approaching.

        I notice its in the "senstive" column, although I see no reason why.

        • Uh, not quite. Many programs pay out based on need or other variables, they are not just given a set budget. EI payments, for example, cost more when there are more people unemployed, without any decision-making on the part of parliament. Inflation accounts for 2%, I would argue that those other factors account for the rest – though I base that on my inability to think of new spending initiatives, so if there were some that I've forgotten about, I could be quite wrong.

          • EI payments shouldn't cost the gov't money, hence the coming increase in premiums (Which Ignatieff calls a giant tax increase, talk about fiscal irresponsibility!.)

            Its supposed to be paid for by the people who use it. If the Liberals hadn't drained the surplus in the 90's it wouldn't be a problem. As is the increase in payouts is on the books right now but will go away in a few years.

            But there's also been very little inflation this year, in fact the central bank is going to have trouble meeting its 2% target.

            New spending programs under Harper are generally targeted tax breaks. Think the money parents get for putting their kids in hockey. Or write offs for tradesmen's tools. Military is the biggest increase. H1N1 was costly too.

          • Maybe EI payments shouldn't cost the gov't money in principle, but in practice they certainly do. We run EI deficits pretty much every time a recessions rolls around. Besides, EI is just an example, many programs operate like that – health care and education, for example, have certain costs based on intensity, where the more people using the system, the more the government pays out, without any changes to spending laws.

            One year of low inflation is not the point. It was about 2% the years previous, it will likely be 2% after mid-2011, perhaps sooner. Tax breaks don't increase spending, they decrease revenue (with a few minor caveats for things like GST cheques). Defense counts for less than 10% of the budget, meaning they couldn't possibly account for much of the leftover 2% per year increase, unless their budget doubled since 2001 (maybe it did, but I'd be VERY skeptical about that). H1N1 occurred this year, meaning any extra cost (which I would expect to be a rather small part of the health budget) would be rolled into the roughly 15% increase in spending this year that accompanied the stimulus plan and has nothing to do with the 4% annual increase in spending before now.

          • I believe many refundable targeted tax breaks are listed under transfers to individuals. Even if you don't pay taxes you still recieve them. They're not a true tax cut in the sense in the sense that actual tax rates are unchanged. Include the money sent to low income people to pay for bus tickets that I believe Rona Ambrose brought in as an environmental initiative.

            And what natural growth caused the spike in spending then ?

            Surely it must have been new spending programs. The building canada infrastructure fund. Money to vaccinate girls against cervical cancer.

            Because there was no great disaster or recession before now that would have caused such a strain on the system.

            And the rate of growth far exceeded what it did in the 90's, in the period after the cutting had finished.

            It seems like the lessons of proper fiscal restraint have been lost by everyone, not a natural rate of growth phenomena.

    • By my math, the GST cut is $15 billion or so of that $20 billion structural deficit. It was a dumb tax cut.

      • In 07/08 Canada was running a surplus of 10 billion dollars. Explain the advantage of running a surplus of 25 billion instead.

        • Easy one. Back in 07/08, we had much higher than average tax revenues due to the peaking economic cycle. This is exactly when we should be running large surpluses. Just like how much of the deficit now is a cyclical deficit due to the recession, much of that surplus was a cyclical surplus, due to strong corporate profits and consumer spending. And to have a balanced structural budget, you need those cyclical surpluses in order to compensate for the cyclical deficits we are now facing. Don't forget that we're going to lard on $165 billion in new debt in the next few years. I think it would have been a good thing we ran that extra $15 billion surplus back in 07/08.

          • Do you consider it politically realistic for governments to consistently run surpluses? When they do there will be increased demands for new spending or lower taxes that are difficult to resist. I would say that a 10 billion dollar surplus pre-crash is pretty good.
            G-7 countries by surplus size (% of GDP) 2007
            Canada: 1.4%
            Germany: 0.1%
            United Kingdom-2.8%
            United States-2.9%

          • None of those countries are ones I would want to emulate in terms of fiscal policy.

            I agree that our debt:GDP ratio shouldn't be driven to zero, necessarily, but the thing is that Canada is and was in a place demographically and economically that large surpluses make sense. We are on the cusp of the retirement of the boomers, which meant taxes were peaking, and spending was just about to ramp up. In the interests of not overburdening my generation with paying for the bloodsucking narcissists we affectionately call the boomers, I think it's fair to have them somewhat prepare the federal balance sheet in anticipation of their ransacking of government finances in the 2010s, 2020s and 2030s.

          • If memory serves it was Stephen Harper who came under heavy fire for paying down the debt by 40 billion.

            That money was supposed to be used for large national spending programs like Kelowna and day care.

            In a minority situation it would have been impossible to resist the opposition's heavy spending demands.

          • As I said, I was all in favour of surpluses. I want the boomers to pay, no their kids.

          • This article seems to be about political realities. In a perfect world there would have been a heck of a lot of changes I would have made !

            And the PM likely would have wanted to make as well.

            I think its important to take into account the reality of the situation though. What is and isn't possible.

            And looking at the fiscal platforms of the various parties I can emphatically say that Harper's actions were the best of some bad alternatives.

  6. They could start by cutting the corporate welfare and grants, yes, the arts can be cut. I can see the government investing in something, but the out and out hand outs to people should stop.

    • I agree. Cut farm subsidies (estimated by the Economist at $7.8B annually in 2006), eliminate the oil industry and manufacturing welfare that companies beg for, and say to industry whiners:

      "Look, we're bringing corporate tax rates down to a combined 25% rate within a couple years, and we have to start investing in R&D. We're trying to improve interprovincial trade, and create a single securities regulator. We've even engaged in negotiations with EU to get a free trade deal. But a lot of the onus is on you guys and gals, who, despite championing your businesses to receive taxpayer assistance, have done little to innovate and make your companies more competitive in global environment. John and Jane taxpayer are tired or paying for your collective incompetence and complacency. We're trying to prepare this country for the post-recession environment, so suit up.

      • hear hear!

  7. Global recovery is as unlikely as ours.

    And it sounds like the old bumper sticker 'Just give me one more oil boom Lord, and I promise not to piss it away this time.'

    Major Fail on THAT promise.

    • Global recovery is as unlikely as ours.

      These things happen in cycles, you know. It's not like the global economy will never recover.

      It's at times like these when should count our blessings. Canada has a huge endowment of national resources, including the world's second largest oil reserves. Most analysts expect the price of crude to rise over the next decade. As long as we exercise fiscal restraint and reduce growth in future spending, we should be OK. Canada's prospects for the next decade are better than those of most other countries.

      • This isn't a 'normal' cycle. It's a paradigm shift.

        Like when we moved from the Agricultural Age, to the Industrial one.

  8. This is the article I've been dying to read. One should commit it to memory. Finally, facts, like cool water washing away the dirt.

    I've been googling Mr. Geddes' novel. I cannot find it. Tell me it has not been prorogued! (I presume it's not this volume, unless our host is also a former paratrooper, which is not totally beyond belief.)

    • Unlikely it's that novel, unless our post office has somehow developed the capabilitiy to send mail back in time so that it could have been published three years ago.

      • I have heard stories that suggest the Post Office has the ability to make time stand still.

        • We Await Trystero's Silent Empire.

    • I think social assistance is a provincial responsibility, isn't it? So.. CPP and.. GST rebates? I'm not sure whether they count GST rebates as an expense, or simply a reduction in revenue. Even so, it still seems awfully large.

      • There's also the OAS supplement, the Northern Residents deduction, Refundable medical expense supplement, and the Working Income Tax Benefit, from what I could see from a quick perusal of a tax program.

      • I could live without GST rebates. Those 27$ quarterly cheques, while they're a nice bonus, really don't make any difference for me (and I'm currently a student.)

    • Cpp is untouchable as the Feds don't put a penny into it and have no legal access to it for general revenues. No Government would have a legal leg to try and touch the CPP plan. They implement it . Can adjust How much and at what ages etc one can receive pension but can not touch the money or use it for General funds. At that it takes agreement with the majority of the provinces to make any changes in the above.

      • Is that what is meant by "transfers to persons," though? CPP (inter alia) and other legally untouchable obligations?

        • The Liberals drained the CPP surplus in the 90's to balance the budget.

          It only became "untouchable" recently because of a Supreme Court decision after small bussiness owners got mad as hell that their share of the contributions were going to general revenue.

    • Wasn't there a revenue-sharing plan put in place during the Chretien or Martin years for health care costs? I might be completely misremembering this, but I thought such a scheme was at least put up for discussion.

        • Thanks for the link. Interesting that it's changed so often.

  9. I'm extremely skeptical of 'paradigm shifts'. Knowledge Economies still require energy, industries and resources.

    • Well, we've had several of them, and this is another.

      Since this is a whole new era, old assumptions don't apply.

  10. 'Finance Minister Jim Flaherty is to map out the strategy'

    uhoh, we're in trouble.

  11. Well, we've had many of them. This is another.

    A Knowledge economy is different than anything we've known before, so old assumptions don't apply.

    • Our homes will still require heating, we need to power our computers, massive plasma's, and huge homes. And while "green energy" might be a reality in Canada in the distant future, the third world will continue to need our comparatively cheap resources for their development. China, India, and Russia ain't going green anytime soon.

  12. Sigh, no, agreed. This just irks me to no end, hence the emotions trumping intellect thing.

  13. Prediction: They will cut transfers. Wouldn't be the first time our illustrious Prime Minister has gone back on a pledge.

    • Heck, it wouldn't even be the 20th time…

      • If by pledge you mean going against something that appears in the party's election platform then I can only think of one, maybe two, occasions.

        Income trusts and fixed election dates.

  14. Had a look at Jocelyne Bourgon's study posted on the CIGI site (Program Review: The Government of Canada's Experience Eliminating the Deficit, 1994-1999 – A Canadian Case Study). There were cuts all right, lots of them. Their starting point was : what must we preserve. Very interesting study from the former Clerk of the Privy Council- and one of the points is that you must remain optimistic!

  15. When a company goes out of business, they don't have the luxury of tagging anything as a "sacred cow". The fact is, if you don't have the money, then you don't have the money. Simple as that.

    This includes defence, student assistance, first nations, research, you name it. They should all be cut by a certain amount.

    The only thing that stops governments from cutting is the fact that they lose votes from the people affected by the cuts.

    • I see no reason why millienium schlarships shouldn't be cut!

      Education is a provinicial area of jurisdiction. I still remember getting annoyed at Chretien for that boondoogle.

    • Exactly. And even politically, it's not completely unfeasible. If the coming budget were to call for a one-time 2% reduction in spending across government with a return to 2% growth rates in following years, there would be short-term political pain for the government, but if it came to become an election issue, the public would side with the government. Heck, your average bureaucrat might even be able to swallow it if our MPs were to take a similar paycut.

  16. So, NOW I understand why they needed to prorogue… Hope to see you all at the protest rallies tomorrow!

  17. Yeah, Martin already did the easy stuff…and it wasn't easy.

  18. Start with close to $208 billion, then automatically exclude more than 75 per cent of that amount from cuts? The only difficult thing here is to swallow such nonsense.

    • Harper excluded 50% off the bat, so blame him. Of the sacred cows, the biggest is one I can't see him cutting: defense.

  19. Just hold spending growth to 2% per year and see where we are in 5 years.

    • If you look at Kevin Page's numbers, and hold transfer payments to the provinces and program spending increases to 2%/annum you get a surplus of about 6.4 billion.

      • Yeah but Kevin Page has an agenda. Every interview I see him in he's advocating that the stimulus not be stopped in some way or another. He suggested cities need more time to use the money and that "use it or lose it" was creating an asset bubble.

        (Which is the entire point of a stimulus, to create demand!)

        Then he said that native infrastructure in the stimulus needs to continue.

        So basically its only after he makes a whole bunch of policy suggestions that the numbers come out to a deficit equally rougly the size of the 2% GST cuts.

        But hey, no, the guy is completely unbiased!

        • Isn't the other major figure advocating that the Economic Action Plan "not be stopped in one way or another" the Prime Minister of Canada?

          • He's talking beyond the two year time frame. Harper has been quite firm on the 2011 end date.

            Even now we're seeing big city mayors demanding a steady stream of stimulus cash to continue on forever. Having Kevin Page out there saying the same thing isn't exactly helpful at a time when fiscal discipline must be stressed.

  20. Question for the crowd….how much of a sacred cow is defence, really? Not should-be, or shouldn't be, but in tangible votes compared to the alternatives like cutting transfer payments, or bringing in new taxes?

    Obviously I'm hedging towards saying that the Liberals could gut defence and use the breathing room for other programs. Once the troops are out next year I don't see why they couldn't savage the department like in the 90s. But I seriously don't know if I'm alone here. It's kind of strange that nobody is suggesting it as a place for cuts.

    • Canada has committed to some significant equipment purchases, no?(unless of course the government of the day cancels orders and pays the penalty, which is why there's a significant equipment purchase to consider)
      I'd rather pay more GST and see DND recruit effectively, improve conditions for our service people and purchase the desparately needed equipment. In short, properly fund that department. Unfortunately, that won't help the deficit/debt issue, so its pipe dream.

      • There is some wiggle room.

        A lot of the purchases can be delayed. That creates some breathing space and could actually be a helpful idea.

    • It's not a sacred cow. But defense was cut so much for so long that in my opinion it's the last thing that should be touched. The Liberals of the 90s and early 2000s allowed the forces to fall apart for lack of funding.

      • Because it's better to have lots of fancy new weaponry rather than fancy new scanners in our hospitals…

        • Because its better to have Hercs that rescue our citizens from Haiti and save thousands of lives !

        • So you're one of those idiot peace-niks that thinks there will be world peace if we just all hold hands together. With more people like you around we'd be speaking either Russian, German or Japanese right now.

          • Not to mention in a country like Canada the military is absolutely essential to deal with natural disasters.

          • Not to be a jerk, but to suggest that we really need a large armed forces to defend against such threats is not credible. We need an armed forces, but I would love to hear what threatens, say, our "hospitals" that requires a)heavy lift capacity b)new frigates/destroyers, c)4.5/5 generation fighters, d)new battle tanks, e)new APCs, f)deep water arctic ports, or g)new armed icebreakers.

            Alternatively, I'd love to hear how any of the above would really help us against those imagine threats, should they magically exist. The above new acquisitions are all great things, but they have absolutely nothing to do with the (im)possibility of "world peace".

            To keep things on topic, please list the specific threats to the Canadian national interest that demand these new acquisitions, and how these acquisitions would help.

          • I'm not an expert, and that's a difficult question, so I'd say all this with a grain of salt…
            a) heavy lift seems very important to me, to be ably to deploy around the world and even across Canada. Canada needed to rent planes to deploy to afghanistan
            b) new frigates/destroyers- I think we need a minimum of ability to patrol our waters, but overall, destroyers are no longer the deciders of conflicts
            c) fighters – afaik the cf-18s are near the end of their lifetimes, so a replacement will be needed eventually. The cf18s were very important when canada deployed to bosnia, and they are also needed to patrol canadian airspace.
            d) tanks – I'd say they are less important than the others
            e) I don't know what APC stands for
            f) deep water arctic ports – I would like Canada to have one port at least, which makes it easier for canada to assert ownership over northern lands and waterways. But it's not something essential for defense, it's more essential to maintain our borders
            g) armed icebreakers – there is always the possibility of an armed conflict in the north, but I'd say these are less essential. But canada needs a minimum level of icebreaking capability to assist with shipping and to stage rescues

            Without these things, our borders are at threat, particularly in the north. Without them, our ability to respond to an armed conflict is at threat. Do we have enough? I think we need to maintain at least the current level of defense, which means replacing our aging machines, and I think we do need a few additions as well.

          • to fill in e) APC is Armored Personnel Carrier. Obviously these are needed in any dangerous location that Canadians intend to travel. Canada does far too much important work in areas that are too dangerous to be traveling as a sitting duck.

          • These are both absolutely legitimate responses. Reasonable people can argue that these are important purchases for the Forces to make.

            But insofar that they correspond to our national interest, I think my above point holds that they have very little to do with it. These responses nicely illustrate that these acquisitions have little to do with defending, say, Canadian "hospitals" or our constitution from Russian/German/Japanese/whatever influence.

            We could get by as a country perfectly well without these things. We can drive old tanks and APCs. We can fly old jets. Lots of countries do it and get by just fine. Moreover, the canard about sovereignty in the north has been lambasted before here in Macleans by writers better than I.

            Anyways, these are all nice to haves. They are not need to haves. If we are serious about fiscal restraint, then we, as a country, are going to have to understand the difference.

          • As for health scanners, if we really want more scanners in Canada we'd open up the health service to private investment. We'd have a lot more if we didn't have a nationalized and socialized health service.

            There's no need to trash our defense forces because of our poor decisions on health care.

          • Absolutely. If there is demand, why not open up the market to augment supply? Perhaps because it is indeed a slippery slope: when people realize the benefits of the freedom to seek medical care, we will allocate our funds more responsively and wisely than our government masters.

  21. With recalibration will come clarity.

    • Um, let's hope so.

  22. Why look at the 2008/2009 budget (which doesn't include stimulus funding) – lets look at the numbers behind the Kevin Page projection of a structural deficit of 19 billion (

    Direct Program spending (so no transfers to individuals or provinces)
    2008/09: 99.8 billion
    2009/10: 122.7 billion
    2010/2011: 118.7 billion
    2011/12: 114.6 billion
    2012/13: 118 billion
    2013/2014: 122.1 billion

    So it looks like Kevin Page assumes most of the stimulus-related increases in spending are going to remain in place. That means there is a lot more fat than the article above suggests. Indeed, if Canada spent the exact same in program spending during 2010/11 as it did 2008/2009, with subsequent increases, the budget would be roughly balanced, despite increases in all kinds of transfers, and increased debt charges.

    • PS: here are Kevin Pages assumptions, as best I can tell
      1. Revenue will grow 5%/year (he is working in nominal terms).
      2. Program spending will even out (after stimulus spending is scaled back) to 122.1 billion in 2013, roughly where it would be had it grown at 4%/year from 99.8 billion on.
      3. Transfers to the provinces will grow 5%/year.
      4. Transfers to individuals will grow by about 4%/year.
      5. Public debt charges will increase from 31 billion in 2008/09 to 42.6 billion in 2013/14.

      If program spending instead grew at 2%, as did transfers to the provinces (meaning that, most likely, they would be at the same pace as inflation), things in 2013 would look as follows:
      Revenue: 281 billion
      Transfers to provinces: 51 billion
      Transfers to individuals: 75.6 billion
      Program spending: 110 billion
      Debt charges: ~38 billion (the debt would be smaller because we would have spent less, though this is a rough calculation)
      Surplus: 6.4 billion

      This was with no cuts, only spending restraint.

    • Um, not quite. Assume a very conservative growth rate of 3% from 08/09 levels, plus $6 billion in new interest charges from the deficit spending over that time period, and bingo: $121.7 billion in 13/14. Add to that that that 3% growth over 5 years from 08/09 is probably not realistic, and…

      • 1. Kevin Page already considers the additional interest charges from deficit spending.
        2. With no cuts you need to keep spending growth down to 2%/annum in order to balance the budget by 13/14.

      • How is 3% a very Conservative growth rate ?

        2% is inflation. That's just a matter of saying NO to additional funding. Supposedly the heavy lift is finding cuts!

        Ok, then don't cut anything. Just say no to everything new.

  23. A three-year freeze on federal salaries and benefits, coupled with a 1% lift in GST for the same three years would be quite helpful. The CBC could shift to a PBS-style network, responsible for its own fund-raising. Yet another budget sharpening move would be to actually accept and rigorously follow the recommendations of Canada's Auditor General.

  24. This is why I am so suspicious of those who oppose prorogue because there are so many things the government could be doing. In other words, there are so many meddling, espensive pork projects which would expand government powers in a manner that is politically damaging to reverse.

    We need to have a government that is willing to fall over cuts. That's the only we we can start clawing back on the ballooning parasitism.

  25. One of the real problems in Canada as a whole is we have too many levels of government. The extreme is PEI where 120,000 plus people have municipal, provincial & federal governments. Until we look at reducing the size of government and also stop expecting governments to be involved in every aspect of our lives, we will be challenged to balance the books. On the other side of the Atlantic QUANGOs chew up a tonne of government money and this is an area we also need to look at in Canada……………………..but in the end the biggest question will be "Who has the guts and ability to politically manage the necessary cuts?"

  26. (Continues from above)
    Instead, every government expenditure should be put to the following test: Does it benefit or have the potential of benefitting ALL Canadians? If the benefits primarily focus on a single region or group, race, culture, livelihood, language, etc., the plan should immediately be disgarded. Rather, our efforts and moneys should be focused on benefitting all Canadians. Examples include education, health, environment, law enforcement, protection of our country, infrastructure, and equality.
    If we could find the 'government will' and the 'Canadian will' to finally take our economic situation seriously, then we could immediately start enjoying real economic improvements.
    Or, we can stay the current course; that of taxing and spending ourselves into oblivion. And, as our previous generation seems to feel (without remorse), we can simply load our current unnecessary excesses and the resulting debt on the shoulders of our children. Is this what we really want?
    Kids, be aware of what the adult society is planning to pass on to you!

    • As reducing government spending reduces aggregate demand and slows down the economy, as there is a multiplier effect to government spending, as those who use government money spend it in the private economy and help maintain that private economy, then by your logic, all government spending passes the test – indeed it does benefit or have the potential to benefit all Canadians. Reducing that spending likewise would harm all Canadians, unless aggregate demand is restored to such a level that reducing such spending can cool off an overheating economy. As Canada has a sovereign currency there is no risk of default so there are no grounds for the speculators to complain and attack us. The experience of the 1990s moreover shows that deficits are reduced not by cuts but by economic activity, by employment, activities that increase revenue. Cutting spending reduces employment and decreases revenue. The priority of a government is to maintain spending, even increase spending, until full employment happens, and by that I mean real full employment, not NAIRU quackery that is the dirty secret of western governments – that people are unemployed because governments want it, claiming that if they work they will cause inflation. This is an extremely wasteful economic theory that belongs in the realm of bloodletting and leeches to cure medical ills.

  27. Actually balancing the budget might not be as difficult as some suggest if Canadians could be encouraged to think beyond our own front door. As I've written many times, we simply have to separate our 'needs' from our 'wants.' For voters and governments who can't seem to sort this out, the method is rather elementary.
    For the moment, let's overlook the sole method which governments use to gain power; that of buying votes with money they don't have.

  28. Unfortunately your suggestions and reasoning haven't worked in the past and are unlikely to work in the future. We can play around with semantics or we can take action to reduce our debt, as I've suggested.
    Wasteful government spending has seldom if ever, been shown to have 'long term' positive effects on any economy. Government spending money which it doesn't (we don't) have, to 'stimulate' an economy is poor economics, regardless where you sit.
    Like all other economies, we are susceptible to unmanageable debt loads and run-away inflation which eventually hurts us all.
    Far better, we decide on priorities and focus our spending in directions where (all) Canadians get the 'most bang for the buck.' Teaching and/or encouraging irresponsibility or self-focus at the expense of others is not an asset. Catering to the whims of the 'gimme groups' and other selective interest groups must stop. We simply cannot afford the waste.