Budget puts Ottawa back where Canadians want it
The Trudeau government’s first budget has now been unveiled. Not surprisingly it has its critics.
Those who don’t like Budget 2016 have described it as profligate, a return to “big government.” This is nonsense.
When the Financial Times of London, not known for its socialist leanings and fiscal laxity, praises a Canadian government budget in its editorial pages as showing “fiscal good sense,” as the FT did a few days ago, you can rest assured this is not the stuff of bloated government.
That said, Justin Trudeau’s first budget does signal a greater role for Ottawa in the economy and in social policy than that of his immediate predecessor. This does not, however, portend a radically new role for the federal government as much as it does a return to the status quo ante.
For most of the past 60-odd years, federal governments have intervened in areas of provincial jurisdiction or provincial competency. They have done so largely through Ottawa’s ability to raise money and spend it on things like health care, social welfare, post-secondary education and infrastructure, all of which are primarily provincial responsibilities.
Sometimes the federal government engaged in such spending over provincial objections, secure in the knowledge this was in the pursuit of national goals, like improving and equalizing the quality of public services across the country and reducing regional economic disparities.
The anomaly was the Harper government. To be sure, Stephen Harper spent many billions of dollars in areas of provincial jurisdiction through federal transfer payments and other programs. But the Harperites were not nearly as enthusiastic or generous financial benefactors in the big provincial policy domains as were their predecessors. There were two reasons for this. First, Harper was the most decentralist prime minister in modern Canadian history, meaning he believed the provinces should largely take care of their areas of responsibility and the federal government would handle theirs.
Second, the Harper governments significantly reduced Ottawa’s revenue capacity — by at least $45 billion a year — through a litany of tax cuts, such that today the federal revenue to gross domestic product ratio, a rough proxy for the size and reach of the government, is just over 14 per cent, its lowest level in half a century.
It is a lot easier for Ottawa to refrain from significant spending in areas of provincial jurisdiction when its revenue base is that constrained.
That was the basic model of the federal government for the past 10 years — a highly decentralized administration, with reduced fiscal capacity, that did not engage in the scale of spending in areas of provincial jurisdiction in which most of its predecessors had indulged.
The Trudeau Liberals, by contrast, reject this model of the federation. That was glaringly apparent both in the election and in Budget 2016. They want a return to the role Ottawa has played fairly consistently for many decades, notably in health care, infrastructure, post-secondary education, pensions and social welfare, areas that are not strictly in the federal government’s jurisdiction. That isn’t big government, it is back to normal for this country.
But there is a problem looming. The federal deficits projected for the next few years, at about1per cent of GDP, are small by historical standards and in comparison to many other countries — the U.K. deficit to GDP ratio, by contrast, is nearly 6 per cent of GDP. And the size of the federal debt relative to the economy, at about 30 per cent, is also low by past Canadian and international comparative standards. That is the good news.
It’s the revenue base that is the problem. The federal government’s tax regime was designed by and for a decentralized government not keen on spending in areas of provincial jurisdiction. It is wishful thinking to believe we can return to the more traditional role of the federal government with a tax structure designed for a Harperite view of the federation. That is the elephant in the room that no one wants to acknowledge.
Canadians voted in the last election for a federal government role more akin to what they were accustomed to for most of the time since the end of the Second World War. That is essentially what Trudeau promised and what he has begun to deliver in Budget 2016. Unfortunately, no one has bothered to tell Canadians the inconvenient truth, namely that you can’t have that comfortable Ottawa model of old on the tax structure of new, unless you are prepared for the federal government to run deficits indefinitely. And no one seems to want to go down that road.
It is wishful thinking to believe we can return to the traditional role of the government with a tax structure designed for a Harperite view