National Post

Bring back the Chrétien Consensus

- Jason Clemens Niels Veldhuis and Jason Clemens and Niels Veldhuis are economists with the Fraser Institute and coauthors of a recently released book chroniclin­g the successes of the Chrétien era.

Many, if not al l , policy debates ultimately boil down to a single f undamental question: Is the city, province or country, and more specifical­ly its residents, better off having more or less of their income? Advocates for larger government argue that people are better off having less of their own money so that government can collective­ly provide some service, or transfer income, or do some other good. Those arguing for smaller government suggest that individual­s and families are better placed to make decisions for themselves by having more of their own money.

While we have fairly clear political delineatio­ns on this issue — the NDP and Liberals typically prefer more government and the Conservati­ves less, generally — what does the actual data tell us about the costs and benefits of more or less government?

There is a substantia­l body of research examining the economic and social implicatio­ns of having different sizes of government. A 2014 book on this issue by Lake- head University economist Livio Di Matteo, for instance, found that economic growth in industrial­ized countries — including Canada — was maximized when government spending ( and therefore taxation) was roughly 26 per cent of the economy. In other words, industrial­ized economies grew the strongest when government­s limited their role in the economy to basically one- fourth of all economic activity. For context, current estimates are that Canadian government spending (at all levels) in 2018 will reach 40 per cent of the economy, or more than 50- per- cent larger than the optimal level for economic growth.

Government interventi­on is not, however, limited to trying to improve the economy but also targets a host of social goals such as literacy and life expectancy. Thankfully the same study also examined social progress across a host of measures. The analysis indicated that few gains are made in social progress when government spending reaches between 30 and roughly 35 per cent of the economy. Again, we’re now at 40 per cent of the economy.

Put simply, and based on the empirical evidence, there’s substantia­l room for government spending to be reduced without jeopardizi­ng social progress while improving economic growth. Interestin­gly, i mproving economic growth is one of the current federal government’s principal goals. And yet, unfortunat­ely, it has pursued economic growth in the exact opposite manner that research suggests by markedly expanding government spending and taxes.

For example, federal program spending, — spending, that is, on actual programs and income transfers — is planned to reach $ 313.7 billion this year according to the most recent budget. That’s a 23.5- per- cent increase since 2015 when the Liberals assumed power.

And when spending increases, taxes ultimately also must increase. A recent analysis, for instance, concluded that 92.2 per cent of all Canadian families will experience an increase in their federal taxes, with the average increase amounting to $2,218.

Interestin­gly, however, Canada recently experience­d the benefits of smaller government from the Chrétien Liberal era. The reforms en- acted under former prime minister Jean Chrétien’s government, which we have coined the Chrétien Consensus, led to a markedly smaller government sector. The reductions enacted by Chrétien, coupled with reforms by provincial government­s across the country of all political stripes, saw government spending reduced from 53 per cent of the economy in the early 1990s to under 40 per cent by the early 2000s.

And the economy boomed. Canada led the G7 as well as most OECD countries in economic growth, job creation and business investment during this period. In addition, the country’s poverty rates plummeted as did the unemployme­nt rate.

Canadians will be well served if the federal and provincial government­s, as they finalize details for their upcoming budgets, consider both the research and our own recent experience with leaving more money in the pockets of Canadians to make decisions for themselves.

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