How to cut $20-billion from spending without really trying

Andrew Coyne solves the budget crisis

My colleague John Geddes has written a sensible, sobering article explaining just how difficult it will be for the government to balance the books solely by cutting spending, ie without raising taxes.

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.

Impossible? Impossible is nothing. It’s true, as John suggests, that it can’t be done just by cutting “waste, fraud and duplication”: not because it isn’t there, but because governments aren’t very good at getting at it. Another round of “expenditure review” isn’t going to do the trick, any more than the last several rounds did. But make some fundamental choices about what government should and should not be doing, be prepared to tackle a few entrenched interests, and the task looks quite achievable.

Suppose we were to try to erase the deficit in four years, that is by fiscal 2014. The timetable seems reasonable, as that is the period over which the Parliamentary Budget Officer reckons the cyclical component of the deficit would have been retired by economic growth, leaving only the structural component, which he estimates at $19-billion. So to wipe that out without raising taxes, the government would need to cut about $20-billion out of spending — not from this year’s projected total of $273-billion, but from spending in 2014, projected to be $296-billion. (Where did I get that number from? See page 22 of the September fiscal update, where the government’s five-year spending track is laid out.)

For simplicity’s sake, assume there is nothing we can do about the government’s biggest single spending program, interest payments on the debt — forecast to explode from just under $31-billion this year to $42-billion in 2014. So that means we have to cut $20-billion out of $254-billion in program spending. The $234-billion target that implies is $8-billion less than we’re on track to spend this year. Sounds tough. But this year’s figure is inflated by the enormous surge in one-time spending rushed out the door in the name of stimulating the economy. A better comparison would be with last year’s total of $208-billion. The 12.5% increase in spending this implies between 2009 and 2014 is just slightly more than the combined increase in prices (6.1%) and population (5.3%) projected over the same period.

So the task, in other words, is to hold spending more or less level in real per capita terms, that is after adjusting for inflation and population growth, with where it was last year. That’s hardly savage: In 2014, the government would still be spending the same amount of inflation-adjusted dollars per citizen as it spent in 2009 — which was 25% more inflation-adjusted dollars per citizen than it spent in 2000.

Can it be done? Start with Transfers to other levels of government. The Harper government has promised not to cut these, or not to cut them much. Yet these have been among the fastest growing items of federal spending in recent years, rising from $29-billion in 2004 to $46.5-billion in 2009. By 2014, they are projected to rise to nearly $60-billion, a 28% increase. Suppose instead these were held to the same inflation-plus-population escalator I’ve suggested for the rest of federal spending. On its own, that would shave $8-billion off federal spending, without reducing the real value of per capita transfers by a nickel.

Still, the provinces would squawk. So let’s go easy on them. Let’s just hold transfers level as a percentage of GDP. Instead of growing by 12.5%, as under the inflation-plus-population rule, they’d be allowed to grow 16%, in line with projected GDP (from $1.609 trillion in calendar 2008, my proxy for fiscal 2009, to $1.862 trillion in calendar 2013). They wouldn’t actually be cut, you understand. They just wouldn’t grow quite as fast as planned. That still yields $6-billion in annual savings four years out.

Next, look at Other operating expenses (under the heading “Direct Program Expenses”), which measures the federal government’s own internal departmental spending. At present, this is scheduled to rise from $61.5-billion in 2009 to $78-billion in 2014. Hold the increase to inflation-plus-population — capping wage increases at 2% per year, for example — and you save roughly $9-billion. But the unions would squawk. So hold it to the less stringent GDP-growth track and save about $6.8-billion.

Okay. That’s about $13-billion we’ve saved so far. Where do we find the other $7-billion? Easy. Let’s dive in to the Crown corporations line item, pencilled in at about $7.6-billion in 2014. (Warning: you’ll need a pencil, a calculator, and a copy of part I of the Estimates for this next bit.) I’ll take it as read that the $2-billion annually for Canada Mortgage and Housing Corp. is inviolable, especially in present circumstances. About $1-billion of what remains is for the CBC. As I’ve often argued, it is long since time the corporation was supported by its viewers, rather than the taxpayers. Put the main English and French television networks on pay, and you could save at least half that amount, or $500-million. Via Rail and AECL should likewise be put on track to full cost recovery in four years, which would save another $500-million.

That leaves us with that inviting grab bag known as other transfer payments, some $33-billion in all (in 2014). These are not spending on federal programs, but transfers to others — much of them to private industry, wher they distort economic choices and reward corporations for failing in the marketplace. There’s good reason beyond budget stringency to want to put a stop to this.

Start by shutting down the “regional development” slush-funds — ACOA, EDAC-ROQ, FEDNOR, WEDC, and whatever we’re calling the southern Ontario thing — and you save about $700-million in transfer payments (in addition to about $250-million in operating expenses).

Next, take a look at the five big granting departments: Agriculture, Heritage, Industry, Natural Resources and Transport. Between them they dispense about $9-billion in transfers and subsidies of one kind or another. Of that amount, roughly $1.5-billion takes the form of explicit handouts to private industry (see the Public Accounts, Volume III, Section 6) which suggests that would be a good intitial target for savings. But if you really want to have some fun, have a stroll through the detailed list of transfer payments in the Public Accounts, thousands and thousands of them in all just to list the grants and contributions over $100,000 takes 289 pages of 6-point type. Not only do you come away with the firm impression that every company, organization and community group in the country is on the federal take, but there must surely be another $1-billion that could be carved out of this, just by occasionally urging a little self-reliance on the recipients. And I’m being kind.

That still leaves us about $3-billion short of our $20-billion target. But there’s a whole area of spending we haven’t considered: the billions in spending delivered through the tax system, in the form of credits and exemptions, known as “tax expenditures.” (Finance reckons the cost of these here.) A prime candidate for the chop would be the old age tax credit, now worth more than $2-billion annually. Neither income-related, like the Guaranteed Income Supplement, nor contributory, like the Canada Pension Plan, this is simply free money, paid out to everyone rich or poor, above the age of 65, at the cost of everyone, poor or rich, under. That makes no sense. The credit should be folded into an enriched GIS, at a savings of, say, $1-billion.

Throw in some of the more egregious departures from tax neutrality among the remaining credits — the $120 million subsidy to Labour Sponsored Venture Capital Funds, $365 million to give a lifetime capital gains exemption to farmers and fishermen, $635 million to do the same for small businesses, the $255 million favour to the resource industries through so-called “flow-through” shares, $300 million in tax credits for movie producers, $255 million in special investment tax credits for Atlantic Canada, and so on — and we’re done.

Bear in mind that we’ve really only gone for the low-hanging fruit here. We haven’t touched the $26-billion that goes out the door every year in Old Age Security — like the old age tax credit, it is given out to everyone rich or poor, just because they’re old. Neither have we broached the subject of reforming our unwieldy $22-billion employment insurance system. Whether we will be able to continue to overlook these programs in the years and decades to come, when the fiscal crunch, driven by the aging population, grows more acute, is an open question. But for now we’ve spared them altogether.

As we have much else: neither the $6-billion in transfers to native bands, nor the $3.3-billion in CIDA grants comes under the knife here, though both are widely considered rife with mismanagement, on the theory that people would prefer to see any savings achieved through reform put back into these programs. Likewise, some of the larger tax expenditures, such as the inclusion rate for capital gains, the charitable tax credit, or the zero-rating of groceries under the GST, await more comprehensive reform exercises. For now, we have focused on cutting only the most obviously and overtly harmful spending.

To sum up: hold provincial transfers and departmental spending to about 3% per annum (from 2009 levels); shutter the regional development agencies, make the larger Crown corporations pay their own way, close the corporate welfare spigot — in a word, desubsidize the economy; and enforce some basic principles of fairness and neutrality, and you’re there. As it turns out, the burden is neatly divided into three, roughly equal parts: one-third from the provinces, one-third from the feds, and one-third from everyone else.

There. That wasn’t so hard, was it?

UPDATE: If you want to see what real fiscal conservativism looks like, the Canadian Taxpayers Federation has a plan to balance the budget in three years, rather than the pallid four-year plan outlined here. They’d slash spending all the way to $214-billion by fiscal 2013, including cuts of roughly $5-billion in “grants and contributions,” twice as much as I’ve included.

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