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