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The Fraser Institute

Fraser Institute Study Makes the Case for Smaller More Efficient Government

Contact:

William Mackness, Author
(905) 331-7783, Email: mackness@sprint.ca

Release Date: 18 May 1999

VANCOUVER, BC-Cutting back on its oversized government sector offers Canada the prospect of lower taxes, stronger economic growth and reduced unemployment says a new study, "Canadian Public Spending: The Case for Smaller More Efficient Government," released today by The Fraser Institute.

Author William Mackness argues that the size of the government sector relative to the size of the economy supporting it is critically important to economic and social performance. In particular, he notes that, like other economic activity, expansion of the government sector is subject to diminishing returns and rising overheads. These realities determine that there is an optimum or maximum efficient size for the government sector, as there is for other sectors in the economy.

New government spending beyond the maximum efficient level produces benefits that are increasingly exceeded by the offsetting costs of requisite new taxes, leaving society that much poorer. It is worth noting that, if there were no maximum size constraint, it would be feasible to expand the government sector endlessly on a Soviet model.

The paper arrives at two principal conclusions: "First, while big government holds out an engaging promise of progress, enlightenment and compassion, it simply does not deliver in practice. Second, in addition to not delivering on the plus side, oversized government inexorably produces high taxes, slow growth and high unemployment. The very close association observed between big government and high unemployment across the industrial economies is as striking as it is lamentable," says Mackness.

In terms of big government actually improving the circumstances of lower income Canadians, the paper notes that the real income share of the lowest income quintile is virtually unchanged over the last 30 years. Moreover, the quality of that income has deteriorated seriously with earned income actually falling and being replaced by increased dependence on transfer payments.

The author takes the position that "if big government were accomplishing its objectives, there should be something to show for the immense sums being expended. In particular, countries like Canada, which have vastly expanded the public sector over the last generation, should be posting measurably better performance compared to countries that have kept the government sector and related overheads relatively small."

The record is otherwise. Across a broad range of social and economic indicators there is simply no evidence that big government countries produce superior economic and social results compared to small government countries. Of even greater consequence, the record is equally clear that big government countries inexorably and without exception produce high taxes, slow growth and high unemployment.

The study makes a sharp distinction between the overall size of the government sector and the quality of individual programs. "The critical weakness of oversized government is the costs and disincentive effects of having the government sector appropriating something in the order of 50 percent of everything being produced in the national economy. It is paying for big government programs, not managing them, that is the Achilles heel of big government," says Mackness.

Evidence from Canada and abroad indicates that the government sector reaches optimum or maximum efficient size when government spending accounts for about 20 to 30 percent of Gross Domestic Product (GDP). Government spending in Canada is far above this range; from a level of 30 percent of GDP in 1966, the government sector reached a peak of 52 percent in 1992, and has subsequently fallen to 45 percent (1997).

Canada's embrace of big government, which began in the 1960s, has produced the same dismal results experienced in big government European countries. Canada needs to regain its earlier, higher levels of productivity and economic growth. To this end, Mackness proposes a smaller more efficient government sector. The paper outlines a multi-year program of expenditure restraint, tax relief, and debt elimination to reduce the size of the government sector to the 30 percent of GDP level. The process, including a key zero net debt target, could be completed in about 15 years.

Reducing net debt to zero is important because it eliminates today's massive interest costs, which currently amount to about 9 percent of GDP or about 20 percent of total government revenues. With the introduction of limited government, it is important that the government sector's restricted 30 percent share of GDP be available in its entirety for productive program spending, rather than being diverted to debt service. "That is what taxpayers are paying taxes for." emphasizes Mackness.


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

For the full text of this study visit the web site at www.fraserinstitute.ca. For further information, or for a copy of "Canadian Public Spending: The for Smaller More Efficient Government, contact:

Suzanne Walters,Director of Communications The Fraser Institute, (604) 714-4582, Email: suzannew@fraserinstitute.ca





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