What Could Conservatives Cut?
Straight Goods contacted me last week for an article about what the federal Conservatives might cut to balance the budget. This concern is understandable given the previous Liberal governmentâ€™s slash-and-burn approach to deficits. At a minimum, the Conservatives may use the deficit as cover to remove funding from particular programs or organizations that they dislike.
However, the Conservatives do not seem to be setting the stage for large cuts. On the contrary, they are sensibly arguing that fighting the recession takes priority over fighting the deficit. They plan to slowly balance the budget over several years by holding spending increases below the rate of economic growth. This approach entails a gradual erosion of the share of economic resources available for public purposes, but not immediately objectionable cutbacks.
For those of us who believe in public services, a better approach would be to reverse some of the Conservative tax cuts, which Finance Canada estimates will cost $44.4 billion per year in lost revenue by 2013-14. But since the Conservatives ostensibly believe in smaller government, it is worth asking why they are not angling to slash public spending.
A simple review of federal expenditures provides much of the answer. The federal government spends money on three things: transfers to individuals (Old Age Security, Employment Insurance and child benefits), transfers to provincial governments, and federally-delivered services. The Conservatives have pledged not to cut either type of transfer.
The federal budget indicates that major transfer programs account for just over half of federal spending, leaving the remaining half potentially vulnerable to Conservative cuts. However, the Public Accounts demonstrate that many federally-delivered services actually include significant cash transfers to people, businesses and other governments.
In 2008-09, the last complete fiscal year, the federal government spent $108.1 billion on major transfer programs, $30.2 billion on transfers through other programs, and $69.6 billion on federal departments and agencies. If all transfers are untouchable, then only one-third ofÂ federal expendituresÂ are eligible for cuts (i.e. $69.6 / $207.9 = 33%).
Out of that third, National Defence was $18.8 billion and Public Safety was $8.9 billion. If anything, the Conservatives would like to spend more in these areas. The Canada Revenue Agency was $7.1 billion and the Treasury Board was $2.2 billion. TheseÂ entities are presumably indispensable in collecting taxes and managing expenditures. Crown-corporation expenses were $8.1 billion, funding needed to deliver the mail, insure mortgages and generate Crown-corporation revenues.
Excluding these expenditures leaves only $24.5 billion from which the Conservatives could realistically cut. To put that number in perspective, it is less than half of this yearâ€™s deficit, about half of the deficit projected for 2010-11, and a few billion below the deficit projected for 2011-12. So even if the Conservatives completely eliminated the federal departments of Agriculture, Environment, Fisheries, Foreign Affairs, Health, Human Resources, Indian Affairs, Industry, Justice, Natural Resources and Public Works,Â they would still notÂ save enough to balance the budget next year or even the year after that.
Ottawa writes large and important cheques to seniors, unemployed workers, parents, and provincial governments. But as an institution, the federal government isÂ no longerÂ very large, especially if one excludes the military and security forces. There is simply not much room to cut.
Therefore, I tend to believe that the federal government will just try to restrict spending growth and wait for revenues to recover along with the economy. As Carl Sonnen suggested to Straight Goods, the real and imminent threat of cutbacks is from provincial governments.
UPDATE (January 21): With Stockwell Dayâ€™s appointment as President of the Treasury Board, Conservative rhetoric appears to be turning away from waiting for economic recovery to balance the budget and toward cutbacks. However, it remains unclear to me what they will cut, if transfers are really sacrosanct.