November 2001
No New Spending (Reallocate Instead)
by Jason Clemens & Joel Emes
There are increasing signs that the federal government will soon announce large and likely permanent increases in defence and security-related spending. The government has two basic choices available to it to finance these new expenditures: increase taxes or decrease other spending. Financing the expenditures through deficits will simply defer the decision about whether to increase taxes or decrease spending to some time in the future.
Given the horrendous events of September 11 th and the importance to Canada of both homeland security and fulfilling its international commitments, new spending on security and national defence is warranted. This new spending should not, however, be accompanied by higher taxes, but rather should be funded by eliminating other spending. The key to financing new defence and security spending while controlling the size of government is to rationalize and prioritize current spending in other portfolios. In other words, the federal government should get back to providing those core services—like national defence and security—which we actually need, while getting out of programs like corporate subsidization and regional development.
Historical measures of defence and security spending, such as the percentage of government expenditures, or the percentage of GDP spent on such programs, provides some idea how large the contemplated spending increases may be.
In general, spending on the protection of persons and property has been falling significantly both as a percentage of total government spending and as a percentage of GDP. In 1966, the first year for which data is available, 13.2 percent of all government expenditures were on the protection of persons and property. This includes national defence, police and correctional services, and fire fighting— in other words, the core responsibilities of government.
Spending on the protection of persons and property is currently estimated at 7.8 percent of total expenditures. Put differently, between 1966 and 2001, the percentage of government spending devoted to the protection of citizens and property declined by an astounding 40.9 percent. If Canadian governments were to return to the 1966 level of spending on the protection of people and property relative to total expenditures, it billion from other departments.
Another way of looking at the potential increase in spending on security and defence is to relate these expenditures to GDP. In 1966, expenditures on the protection of persons and property consumed 3.9 percent of GDP. It currently stands at 3.1 percent of GDP. In other words, as a share of the economy, expenditures on the protection of persons and property have declined by 20.5 percent between 1966 and 2001.
If Canadian governments were to return to spending 3.9 percent of GDP on the protection of persons and property, a reallocation of some $8.6 billion would be required from other departments.
Yet another way of looking at the serious decline in government expenditures dedicated to the core role of protecting citizens against aggression—both foreign and domestic—is to view the national defence budget. A little-known fact regarding the federal Liberals’ belt-tightening exercise since coming to office in 1993 is that defence is the only area of federal government direct spending in which cuts were implemented. In fact, between the 1993/94 and 2000/01 fiscal years, real defence spending dropped 15.7 percent, from $14.0 billion to $11.8 billion.
The new reality we find ourselves in after the terrible events of September 11 th requires additional spending on the protection of persons and property. Historical comparisons imply that said increases in spending are most likely to be significant and permanent.
The only lingering question, then, is how best to finance this new spending. The last thing Canadian governments should do is increase total spending and therefore taxes. What needs to be done, and incidentally what The Fraser Institute has been recommending for years, is that government spending be re-prioritized. That is, governments should get back to doing those things we actually need them to do, such as national defence, and get out of areas they shouldn’t be involved in to begin with, such as subsidizing businesses.
Let us assume that the new spending will amount to roughly $5 billion per year—a middle-of-the-road estimate. The federal government could find these funds within the current spending limits by eliminating transfers to Crown corporations, subsidies to business, and regional development spending, to name just a few. A portion of the savings from these measures could be reallocated to defence and security-related programs. This would enable the federal government to meet its tax reduction commitments announced in 2000 while fulfilling its core responsibility to protect persons and property.
Jason Clemens (jasonc@fraserinstitute.ca) is the Director of Fiscal Studies at The Fraser Institute. He has a Masters Degree in Business Administration from the University of Windsor.
Joel Emes (joele@fraserinstitute.ca) is Senior Research Economist at The Fraser Institute. He has an M.A. in Economics from Simon Fraser University.
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.