July 2000 Fraser Forum: Now You See It... Now They've Spent It
The federal government is mirroring the old magic trick in which a magician mysteriously pulls a rabbit out of a hat. Only in this case, instead of making something appear, the federal government is making money disappear into thin air.
The excitement and euphoria surrounding the recent announcement of tax cuts - and the 2000/01 budget did include some important tax cuts - overshadowed the fact that this is the third straight budget where the government has chosen to spend its windfall revenues rather than offering tax cuts or debt reduction. The proverbial slight of hand is at work: we're told about tax cuts while they're spending feverishly.
As table 1 illustrates, between the 1997/98 and the 1999/00 budgets, the federal government recorded surpluses of $21.6 billion beyond expectations. The excesses were created by a combination of higher than expected tax revenues (totalling $5.7 billion in 1997/98, $4.7 billion in 1998/99, and $5.0 billion in 1999/00), and lower than anticipated interest costs (amounting to $0.6 billion, $2.1 billion, and $3.5 billion in the same three budget periods, respectively). In other words, the federal government had unanticipated cash totalling $6.3 billion, $6.8 billion, and $8.5 billion in fiscal years 1997/98, 1998/99, and 1999/00, respectively.
| 1996- '97 | 1997- '98 | 1998- '99 | 1999- '00 | 2000- '01 | 2001- '02 | 1997- '98 to 2001- '02 | |
|---|---|---|---|---|---|---|---|
| Revenues (1998) | 140.9 | 147.5 | 151.0 | 155.0 | |||
| Revenues (1999) | 140.9 | 153.2 | 156.5 | 156.7 | 159.5 | ||
| Revenues (2000) | 140.9 | 153.2 | 155.7 | 160.0 | 162.0 | 168.0 | 14.8 |
| Cumulative Revisions | 0 | 5.7 | 4.7 | 5.0 | 15.4 | ||
| Program Spending (1998) | 104.8 | 106.0 | 104.5 | 107.0 | |||
| Program Spending (1999) | 104.8 | 108.8 | 112.1 | 111.2 | 113.2 | ||
| Program Spending (2000) | 104.8 | 108.8 | 111.4 | 115.5 | 116.0 | 121.5 | 12.7 |
| Cumulative Revisions | 0 | 2.8 | 6.9 | 8.5 | 18.1 | ||
| Debt (1998) | 583.2 | 583.2 | 583.2 | 583.2 | |||
| Debt (1999) | 583.2 | 579.7 | 579.7 | 579.7 | 579.7 | ||
| Debt (2000) | 583.2 | 579.7 | 576.8 | 576.8 | 576.8 | 576.8 | |
| Cumulative Revisions | 0 | (3.5) | (6.4) | (6.4) | |||
| Interest (1998) | 45.0 | 41.5 | 43.5 | 45.0 | |||
| Interest (1999) | 45.0 | 40.9 | 41.1 | 42.5 | 43.3 | ||
| Interest (2000) | 45.0 | 40.9 | 41.4 | 41.5 | 42.0 | 41.5 | |
| Cumulative Revisions | 0 | (0.6) | (2.1) | (3.5) | (6.2) | ||
| Source: Department of Finance, Federal Budgets (1998, 1999, 2000); analysis by authors. | |||||||
Where the money went
Except for the 1997/98 budget, in which 56 percent of the unexpected windfall was used for debt reduction, the entire remaining sum of unexpected money was spent. Put another way, 84 percent of the total amount of monies available to the federal government in excess of expectations were spent rather than used to reduce Canada's tax burden or the country's $577 billion national debt.
The federal government used the $18.1 billion to finance such programs as the Millennium Scholarship Fund, the ill-conceived Innovation Fund, two "one-time" additional CHST payments, and a plethora of special-interest programs including a host of environmental initiatives.
Are these programs really what Canada needed? Absolutely not! What Canada needs to restore its economic prosperity and return it to a position of economic prominence is serious tax relief for both individuals and businesses, and aggressive debt reduction.
Where the money could have gone
Had the federal government been serious about tax relief and debt reduction, the middle-class tax cut announced in the most recent federal budget, which reduces the middle-income statutory tax rate from 26 percent to 24 percent over two years, could have been fully implemented two years ago. So while the tax cut will be fully effective next year, it could have been fully implemented in 1998 had the unexpected monies received by Ottawa supported tax cuts rather than spending. This is but one of a number of the tax measures announced in the recent budget that could have been implemented in years past had the federal government focused on tax relief rather than spending.
Canada needs a more stringent budget process. The federal government has indeed implemented a prudent and conservative budget planning process that should be applauded. However, the process lacks fiscal controls once the planning phase is over. Unexpected surpluses caused by either lower than anticipated spending, higher than anticipated tax revenues, or lower than anticipated interest costs should be seen for what they are: windfalls. The proceeds should be exclusively applied to debt reduction in the year they occur with tax rates adjusted downward in order to prevent such windfalls from occurring repeatedly.
Even more important than reducing the national debt, however, is reducing taxes. The federal government must accelerate the pace of tax reduction announced in the most recent federal budget and indeed make deeper cuts in order to ensure Canadian tax competitiveness. It's time to stop playing magician's tricks and get serious about tax relief and debt reduction.
info@fraserinstitute.ca
4th Floor, 1770 Burrard Street, Vancouver, BC, Canada, V6J 3G7
Tel: (604) 688-0221 Fax: (604) 688-8539 Book Orders: 1-800-665-3558 ext. 580
You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.