Surplus to Debt Reduction and Tax Cuts: Fund Managers

Pension fund managers view the post-deficit era as an opportunity to right-size government

Release Date: 28 January 1998

VANCOUVER, BC>>>  Canadian money managers responsible for over $130 billion in total assets under management believe that the expected budget surplus should be used to pay down the federal debt and to enact tax cuts, the Winter 1997 Fraser Institute Survey of Senior Investment Managers has found.

The federal government has repeatedly stated that it intends to spend 50 percent of any surplus on programs and the rest apportioned between debt reduction and selective tax cuts. An overwhelming 82 percent of the respondents, however, believe that the federal government should pay down the debt and reduce taxes.

Ottawa should adopt a legislated debt reduction plan and reduce the debt-to-GDP ratio from 73 to 20 percent by the year 2020. The federal net debt has increased from $508 billion in 1993-94 to $583 billion in 1996-97. The federal government's debt-to-GDP ratio (73 percent) is one of the highest among industrialized countries. Survey respondents were asked if the federal government should adopt a legislated debt reduction plan similar to Alberta's to reduce the debt load. Seventy-seven percent said yes. In addition, 33 percent of the respondents would like to see the debt-to-GDP ratio reduced to 20 percent of GDP and 25 percent of the survey participants would like to see a ratio of 30 percent by the year 2020. "A debt reduction plan would certainly help shift the emphasis from deficit elimination to debt reduction," said Fazil Mihlar, Senior Policy Analyst at the Fraser Institute.

Use of contingency reserve for debt reduction: a good idea. The federal government has set up a contingency reserve in its deficit projections to cover unpredictable events and inaccuracies in the economic models used for forecasting. The government has stated that once the budget is balanced, the contingency reserve will be used exclusively for debt reduction, assuming no emergencies or unpredictable events. When respondents were asked whether they support this policy position of the federal government, 92 percent said yes.

Preference for a smaller federal government. A recent IMF study suggests that the growth in government spending worldwide since the 1960s may not have increased economic growth significantly or have contributed to better social welfare outcomes. In short, the larger the share of government in the economy, the lower the rate of economic growth. In Canada, in 1965-66, the share of federal government spending as a percentage of GDP was 15.7 percent. In 1995-96, the figure has risen to 20.4 percent.

In light of this evidence, respondents were asked how they feel about further spending cuts. Eighty-seven percent of the survey participants were either strongly supportive or supportive of further spending cuts at the federal level. When asked what should be the target for the size of the federal government, 57 percent of the respondents felt it should be 15.7 percent of GDP, while 20 percent opted for 17.7. "The money managers appear to have a preference for a much smaller federal presence in the economy," added Mihlar.

End the practice of incorporating EI surplus into consolidated revenues. The federal government presently incorporates the EI surplus into consolidated revenues. Some economic commentators have suggested that this practice has helped the government to reduce the budget deficit by "stealth." When asked, 77 percent of the survey participants recommended that the federal government end this practice, in the interest of transparency.

Bank of Canada receives lower grade. When asked to rate the current performance of the Bank of Canada in its conduct of monetary policy, only 50 percent of the respondents stated that the Bank was doing an excellent or very good job in its conduct of monetary policy. This is in stark contrast to the Fall survey in which 72 percent stated that the Bank's conduct of monetary policy was excellent or very good.

High approval rating for the Minister of Finance.

Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver.

For further information:

Suzanne Walters, Director of Communications,

The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca

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