SPENDING SPREE
Why Canada’s opposition parties can’t backtrack on austerity.
Spending restraint has been the hallmark of Conservative fiscal policy in the post-recession years, and the federal public service — whose unionized members are represented by the Public Service Alliance of Canada (PSAC) — has been obliged to bear almost the full brunt of it.
Unsurprisingly, PSAC has decided to work against the reelection of the Conservatives: the reasoning is presumably that once the Conservatives go, so does the austerity. The opposition parties have not made any great effort to disabuse anyone of this belief, but there’s little reason to think that a government led by the NDP, the Liberals (or some combination) will deviate significantly from the spending agenda that the Conservatives have put in place.
The most useful way to measure public spending is as a share of GDP, for both the level of services provided and the government’s ability to pay for them. Since GDP is a measure of economic activity, it’s useful as a proxy for the available tax base. And since changes in GDP reflect inflation, population increase and real economic growth, GDP also captures the costs of providing a given level of public services. (There is not universal agreement on this last point: Andrew Coyne, for one, prefers real per capita spending.) For a given level of services, public spending should increase in proportion with GDP.
The deficit incurred under the Conservatives was mainly due to the recession: a weakened economy generates reduced revenues, and the stimulus package increased spending. Most of the deficit would have been gone away on its own as revenues recovered and the stimulus package was unwound.
Most, but not all. According to both the Parliamentary Budget Office and the Department of Finance, the structural budget — that is, adjusted for the business cycle — was roughly in balance when the Conservatives took power. (The actual budget was in surplus, thanks to a pre-crisis economy that was operating well above capacity.) Reducing the GST by two percentage points created a structural deficit that the government has closed by gradually reducing federal spending expressed as a share of GDP.
More precisely, direct program expenditures have been reduced. Spending on transfer programs — which accounts for half of all program spending and basically involves sending out cheques — have continued to grow with GDP. Payments to individuals (Employment Insurance, Old Age Security, Universal Child Care Benefit, etc.) have remained at about four per cent of GDP, in line with their share before 2006. Transfers to provinces have also held steady at about 3.2 per cent, also in line with their share before the election of the Conservatives, and high- er than they were under Jean Chrétien’s last mandate. (Anyone familiar with these data is puzzled by claims that Stephen Harper’s government has cut transfers to provinces; the opposite is true.)
Even as transfer payments continued to grow with GDP, nominal direct program expenditures — mainly spending on public-service wages — have either declined or been held constant. As a result, direct program spending expressed as a share of GDP has fallen. Since the costs of providing public services more or less rises with GDP, constant nominal spending means real cuts. And these cuts have been borne almost entirely by public servants, by some combination of reduced employment and reduced benefits. Conservatives would doubtlessly — and not without some justification — respond by noting that expressed as a share of GDP, direct program spending has simply been re- turned to the levels they inherited from Paul Martin’s Liberal government.
This brings us up to date: the membership of the Public Service Alliance of Canada has borne the lion’s share of the Conservatives’ recent spending restraint. According to the 2015 federal budget, the budget balance will move into surplus in the current fiscal year, and small surpluses are projected over the four subsequent years. So does the elimination of the deficit also eliminate the need for further austerity?
No, it doesn’t. Those projected surpluses are a bit of a patch job, held together by baling wire and duct tape: they depend on some conveniently timed asset sales (e.g., the divestment of the federal government’s GM holdings) a delayed reduction in EI contribution rates — and continued spending restraint. Continued restraint on direct program spending, meaning a continued reduction of its share of GDP, is baked into those projected surpluses. Even if all of the spending and tax-reduction measures announced in the 2015 budget were cancelled — and no opposition party has yet gone so far as to promise that — that still would not be enough revenue to prevent a return to deficit.
If the next government were to let direct program spending increase with GDP after the current fiscal year, it would have to find an extra $6.6 billion in 2016-17, $9.4 billion in 2017-18 and $11.3 billion in 2018-19. Actually reversing the Conservatives’ previous cuts would cost even more.
So far, there’s little reason to think that the opposition parties are prepared to offer much more than lip-service to the anti-austerity cause. As it is, the Liberals’ fiscal proposals are underfunded; one presumes that the difference is to be made up by those surpluses that depend on continued spending restraint. And the NDP’s hints about raising the corporate income tax are unlikely to be enough to offset future austerity, much less finance any new spending that they have in mind.
Going on what we know now, all three major parties are explicitly or implicitly campaigning on a platform of continued restraint in direct program spending. Regardless of who wins the next election, the Public Service Alliance of Canada may have to get used to being disappointed.
Does the elimination of the deficit also eliminate the need for further austerity? No, it doesn’t