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McMartin's Budget Preview

Prediction: Canadians will continue to pay more for less in 2007.

Will McMartin 19 Mar 2007TheTyee.ca

Veteran political consultant and analyst Will McMartin is a regular columnist for The Tyee.

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SOURCE: Government of Canada, Fiscal Reference Tables, September 2006, p.10.

When federal Finance Minister Jim Flaherty introduces the Conservative government's 2007-08 budget in the House of Commons later today, most observers can be expected to sift through his presentation for signs of an impending general election.

These short-term political considerations, not surprisingly, are certain to continue to overshadow two long-term fiscal trends.

The first, which may be seen in the above chart, is that portion of the yellow area (which represents the federal government's budgetary revenues as a share of Canada's GDP) lying above the solid black line (Ottawa's program expenses, also as a proportion of GDP).

This area above the solid line is the federal government's operating surplus. Put another way, it is the amount of money sent every year by taxpayers to Ottawa in excess of the programs and services the government provides to Canadians.

As the chart clearly illustrates, the federal government has recorded operating surpluses each year since 1987-88. That is, Canadians have been paying more (in taxes) than they have been receiving (in services) for 20 consecutive years.

The second trend evident in the chart is the marked decline in government expenditures as a proportion of the national economy. While Ottawa's revenues have remained relatively static over the past two decades at 16 per cent or so of GDP, program spending has dropped from nearly 19 per cent in the early 1980s, to 12-13 per cent in recent years.

So, even as Ottawa's revenues have stayed relatively constant, program spending today is barely two-thirds of what it was two decades ago.

Both trends are near certain to continue in Flaherty's upcoming budget, and both are likely to be ignored as the public and news media focus on short-term election speculation.

But it is interesting to contemplate how much longer Canadians will be content to, first, overpay for the level of government services they receive, and second, to watch as the federal government shrinks ever-smaller.

How did we get here?

Canada's federal finances were relatively stable from the 1960s through to the early 1970s. Each year, budgetary revenues and program expenses usually were nearly identical at about 15-16 per cent of GDP.

A typical fiscal year would end with a small operating surplus, although when interest charges on the federal debt were added into the equation, these surpluses often finished as small budgetary deficits.

Still, because Canada's economy was growing at a healthy rate, the federal government's accumulated deficit (which may be thought of as "the debt") fell almost in half as a proportion of GDP -- from 36 per cent from 1961-62, to just 18.4 per cent in 1974-75.

Soaring inflation leads to rising debt costs

The 1970s, as many readers will recall, was a period of soaring inflation, coincident with the two OPEC "oil shocks" of 1974 and 1979.

Interestingly, it was the revenue side of Ottawa's finances that first showed above-average growth. Government income rose to 17-19 per cent of GDP in the first part of the decade, before slipping backward as Canada's economic growth slowed in the latter part of the '70s.

By then, however, Ottawa's expenditures also had begun to climb above their historic average, and hit 20 per cent of GDP in 1975-76. That same year, the federal government's string of 11 consecutive operating surpluses came to an end, replaced with a succession of operating deficits that persisted through a dozen years.

Interest rates skyrocket

At about the same time, interest rates began to skyrocket ever higher. In other words, just as Ottawa each year was adding billions of dollars to the country's accumulated deficit, the cost of borrowing grew prohibitively expensive.

These mounting interest charges ensured that the federal government's fiscal deficits were growing larger and larger, year by year. In 1974-75, the budgetary deficit (the operating deficit plus interest costs) was just 1.4 per cent of GDP, but by the next year it had more than doubled to 3.6 per cent. Three years later, it was 5.3 per cent of GDP, and then in 1982-83 hit a worrisome 7.6 per cent.

Not surprisingly, these yearly shortfalls added billions of dollars to Canada's accumulated deficit. As mentioned earlier, the country's debt as a share of GDP fell in half between 1961-62 and 1974-75. But by 1982-83, the debt was back to 36 per cent of GDP -- and continued to soar ever higher in successive years.

Mulroney's Tories take tepid action

The 1984 federal general election saw Brian Mulroney's Progressive Conservatives win a massive majority government, and a mandate to bring the country's mounting deficits under control.

But Mulroney favoured gradual fiscal change rather than major surgery. The Tories introduced a succession of minor tax increases, which pushed budgetary revenues up from about 16 per cent of GDP to the 17-18 per cent range, and oversaw a plethora of half-hearted spending cuts -- which nonetheless prompted apoplectic fits from the usual suspects -- to reduce program expenses slightly from more than 18 per cent of GDP to about 16 per cent.

After nearly four years in power, in 1987-88, the Mulroney government finally recorded an operating surplus, but public debt charges -- which totalled $25 billion in 1984-85, and rose to $40 billion in 1993-94 -- ensured that the country continued to rack-up sizeable budgetary deficits.

From about 40 per cent of GDP in 1984 when Mulroney won election to government, the accumulated deficit grew to a frightening 67 per cent of GDP in 1993 as nine years of Tory rule came to an end.

The Chrétien-Martin Liberals slash spending

Jean Chrétien led the Liberal party to power in 1993, and quickly named Paul Martin as his minister of finance. It was not at first evident that the Chrétien-Martin duo shared a dedication to deficit elimination, but such quickly proved to be the case.

Martin's 1995 budget marked a dramatic turning point in Canada's finances. As mentioned above, Mulroney's Tories had reduced program spending from about 18 per cent to 16 per cent of GDP, but Martin cut that to under 15 per cent in 1995-96, and then continued slashing until expenditures fell to just 12.1 per cent in 1999-2000 and 2000-01.

For the past eight years, with the exception of a slight pre-election lift in 2004-05, Ottawa's program expenses have remained in the range of 12-13 per cent of GDP.

Government revenues, on the other hand, have stayed at about 16-18 per cent. Consequently, for more than a decade, operating surpluses have averaged $47 billion annually.

Of course, these operating results do not include public debt charges, which, fortunately, due to historic-low interest rates and an ever-declining accumulated deficit (down to 35 per cent of GDP in 2005-06), have been falling year-over-year for the past decade.

From a record $49.4 billion in 1995-96, annual interest charges dipped to a mere $33.8 billion in 2005-06.

And so, since 1997-98, Ottawa has recorded 10 consecutive budgetary surpluses, ranging in size from $1.5 billion (in 2004-05), to $19.9 billion (in 2000-01).

What now?

We now have clear evidence of two long-term trends in Canada's federal finances. First, Canadians send a constant stream of tax dollars to Ottawa (16 per cent of GDP), but receive back a much-lower level of government services (about 12 per cent of GDP). And, second, the latter figure means that the size of the federal government now is the smallest in at least a half-century.

How much longer will either trend continue before becoming a topic of public discourse?

It would not be unreasonable for the first to persist for many years into the future, simply because a sizeable number of Canadians support the notion that some surplus monies ought to be allocated to reducing the country's accumulated deficit. (After peaking at nearly $563 billion in 1996-97, the debt now stands at about $481 billion.)

The second trend seems more likely to lead to a political battle in the near-term, given that the "size of government" is an issue that lends itself to ideological debate between the political right and left.

This seems especially true in British Columbia, because Ottawa and Victoria both have centre-right governments with significant budgetary surpluses, and a clear preference for returning surplus monies to taxpayers through tax cuts, as opposed to initiating new or greatly expanded public sector programs. B.C.'s 2007-08 budget, for example, featured a 10 per cent personal income tax cut and kept program spending increases to a modest level.

Of course, opposition is needed for a political firefight over the size and role of government, and it does not seem that either the federal Conservatives or the BC Liberals at the present time face significant opposition to their fiscal policies. At least, it is not evident that any political party is arguing for larger, more interventionist, and costlier government.

And so perhaps both trends may be expected to continue in the foreseeable future, as Canadians (and British Columbians) pay more for fewer services, with government operations growing ever smaller.

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