Central issues take shape for federal election

With about 15 months before the next federal election, the central issues surrounding the campaign are beginning to take shape. I believe a main issue will centre on the role of government in promoting economic growth: is government a key player or simply a cheerleader for the private sector which does the heavy lifting?

Beginning in the 1970’s the belief began to gain credence, without any empirical evidence to support it, that the public sector is less able to engineer growth than the private sector. And this, in turn, led for calls for reduction in the size of government and cuts in taxes. In the US, this quickly became a key tenet of politicians such as Paul Ryan, the Speaker of the House of Representatives, and the far right in the Republican Party.

A few years back, the Harper government was a strong supporter of this thinking and it appears that Harper’s successor, Andrew Sheer, is similarly persuaded.

The Liberals, on the other hand, take a more interventionist approach and are willing to spend accordingly. They do not believe that deficits and debt are implicitly bad provided reasonable limits are observed (annual deficits less than four per cent of GDP, say, and a stable or declining debt-to-GDP ratio). In the last year, Canada’s debt-to-GDP ratio declined below 90 per cent.

But, the central question is not so much about the raw numbers; rather it is about how the deficits are funded and the nature of the expenditures undertaken with the borrowed funds. Certain government expenditures are considered to be essential for economic growth. These include education, infrastructure, the rule of law and the justice system, basic research and healthcare for the population. Without these, it is fairly certain that an economy cannot grow.

These core government services are not the sole determinants of growth but collectively they play a major role. If these expenditures are reduced, total demand will shrink and growth will either be reduced of turn negative.

There is an instructive example from the period following the financial meltdown of 2008, particularly in Europe. Greece and Spain, both of which had debt-to-GDP ratios well above 100, were forced by the International Monetary Fund to implement programs of severe austerity.

As a result the lack of growth and shrinking government revenues saw the debt-to-GDP ratio hit 179 in Greece. As one commentator said, the supposed cure appeared to be killing the patient.

With unemployment for young people (under 25) in both Spain and Greece reaching over 50 per cent, it is feared that a whole generation will lose its chance at a prosperous future.

The question as to the optimal size of government is difficult to answer with any precision, though recent research indicates that small government is “bad” if it cannot maintain basic infrastructure, the rule of law, and the educational needs of the population. Likewise large government is “bad” if it inhibits the activity of the private sector or interferes excessively in people’s lives.

Just where the “sweet spot” lies for government spending relative to GDP depends, in part, upon the value created by government. One of the basic premises of the small government advocates is that the value of government activities is close to zero.

The implication is that only the private sector can create value. Why is never clearly explained other than the truism that government activities are not bought and sold in a market as contrasted to goods and services in the private sector.

In sum, the small government ideologues see the private sector creating value to be redistributed by the government sector. This sort of reasoning seems unreal to me. I think a bridge has value and so do a constitutionallybased government and an effective education system.

What is obviously needed in this debate is more precise knowledge of just how value is created in the public sector and how its creation shapes the future of the nation.

David Bond is a retired bank economist who resides in Kelowna. This column normally appears Tuesdays.