Fraser Institute Reaction to Federal Budget
Contact:
Joel Emes, Research Economist
The Fraser Institute, (604) 714-4546, Email: joele@fraserinstitute.caMichael Walker, Executive Director
The Fraser Institute, (604) 714-4545 Email: michaelw@fraserinstitute.caRelease Date: 18 February 1997
VANCOUVER, BC>>> The 1997/98 federal budget fails to build on Finance Minister Paul Martin's good work in the last two budgets. The deficit is projected to fall only a paltry $2 billion, to $17 billion. At the same time, tax revenues will increase $2.3 billion. The net public debt increases another $17 billion to $610.3 billion. Canada has not entered the post-deficit era.
Program spending does decline by $3.2 billion, but $2.8 billion of that is due to cuts in transfer payments to the provinces. Adding insult to the province's injury, the federal government also announced for itself $1.8 billion in new program spending. That $1.8 billion could have reduced the deficit, upheld health care transfers to the provinces, or provided Canadians with a much-deserved tax break.
Mr. Paul Martin implied that fiscal balance could be a reality by 1999-2000--the first balanced budget in 30 years. Needless to say, his announcement has initiated debate about how to spend the future surpluses. Those arguing that we can now afford to pour more money into social programs are misled. In reality, the size of government remains excessive, and any fiscal dividend should be applied toward debt reduction and tax cuts.
Since taxes are paid to all levels of government, all-government (consolidated federal, provincial, and local) fiscal performance is what matters. Recently there has been some improvement in controlling government spending at all levels. However, Canada's fiscal situation remains poor by international standards. Other countries maintain high living standards with much lower levels of government involvement. In 1997, total government outlays as a share of GDP is projected to be 45 percent in Canada, which is still well above levels in the U.S., Japan, and the G-7 average at 33, 36, and 39 percent, respectively.
In time, excessive government spending translates to high debt levels. While total government net debt in Canada is predicted to fall from 71 to 69 percent of GDP between 1996 and 1997, it will still be well above the G-7 and OECD averages, both around 47 percent of GDP. In 1997, Canadian net public debt is projected to be the third highest of all OECD countries, just below Italy and Belgium.
Some estimates indicate that the debt load will vanish over time, but most of these understate the extent of our indebtedness. These estimates ignore other forms of government obligations, such as commitments to pay government pension plans and senior's benefits, and fund health care, both of which will increase as the population ages. When program obligations and indirect debt associated with government business enterprises and debt guarantees are included, all-government liabilities are over four times the amount of direct debt--a whopping $3.5 trillion in 1996!
Public expenditures must be reduced further so that in the future the government will have the fiscal flexibility to pay for unexpected emergencies and programs as the need arises. If this "buffer zone" isn't built in, the government will need to borrow more, which will result in higher interest rates. In turn, the higher rates will erode our ability to pay for future social programs. Financing costs are already diminishing the funding available for program spending. In 1995-96, public debt charges accounted for 34 percent of federal government revenues; in 1965-66 that figure was just 12 percent.
Spending cuts alone are not enough. Tax cuts are also necessary. Despite recent tax freezes and some minor cuts, taxes are still well above historical norms. Direct taxes from people (including income and payroll taxes, such as contributions to Employment Insurance and the CPP) to the consolidated government sector have risen 157 percent -- 12 full percentage points of the economy -- between 1965 and 1995.
How does cutting taxes help? Tax cuts increase economic growth and create jobs by lowering both the cost of doing business and the price of goods and services. Tax cuts also increase the incentive to work, discourage the migration of highly skilled labour to countries with lower taxes, and diminish underground economic activity. In an increasingly global economy, tax competitiveness is more important than ever. Only by reducing taxes can our rates be competitive with those in the U.S., which will inevitably encourage new firms to locate in Canada.
Recent efforts to control government spending are just the first step in getting Canada's fiscal future under control. It is premature to speak of a "fiscal dividend." We don't yet have one, and won't for the foreseeable future. While we can anticipate a time when the federal government budget will be balanced, it would be folly to celebrate by increasing public spending with money we neither have nor can afford. Further spending reductions are essential given our comparatively high levels of government spending and consolidated debt. Smaller governments will not jeopardize the Canadian way of life. The government must resist the urge to spend more money; any "extra" money should be returned to those who earned it in the form of tax cuts. We must avoid any regression to the untenable environment of higher taxes, higher deficits, and higher debts.
Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver.
For further information contact:
Suzanne Walters, Director of Communications,
The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca
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