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 government’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 of federal expenditures 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. These 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 year’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, they would still not 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 is no longer 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 Day’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.

7 comments

  • That’s why interest need to be examined if any cuts our to me to optimize any effect. We can cut social security and minimum wage, child benefits if we raise the interest rate so that prices fall in line with those type of cuts as to ensure the cost of living doesn’t rise nor fall causing unnecessary harm. Also raising the interest rates would curtail assets bubble for sure, without estimating when its politically convenient to deal with problems developing later. Second savings would rise in all ages as indicated by historic borne out experiences where higher rates have led to herher savings which led to sustained investment from real income.

    You cannot lower taxes but not address spending, that is a road to disaster, and conservative administrations increasingly show they will go. So if it is politically impossible to make the cuts in government spending which would be needed for following tax cuts the we need higher taxes so we don’t save more then we otherwise would have in fear of future taxes leaving spending decisions unaltered.

    We would have to raise interest rates to such a point that the cost of living falls to such a point and spending decision are unaltered from higher deficits.We could then make the cuts in social security, child benefits, and other subsidies. Then the government could balance the deficit before 2012,13,14.

  • But higher interest rates would increase interest payments on government debt, which would increase the deficit.

    Also, to the extent that higher interest rates would reduce economic output and employment, they would reduce government revenue.

  • Wouldn’t raising interest rates send our dollar even higher?

    But it does look like putting that 2% back on the GST might help.

  • What’s regrettable is that the entire situation has been fabricated from both the Cons and ‘know it alls’ with organizations like the IMF and World Bank, both notorious for insidiously ruining public programs.

    What we need to do is bring back the GST, get corporate tax rates back to where they were (or reduce the deductions that they have available) and get our books back in the black.

    If that doesn’t work, we are now spending unprecedented levels of Canadian tax dollars on multinational armaments and munitions suppliers. Our defense budget has ballooned to $30 billion per year and it doesn’t look like it has a cap any time soon.

    Cutting that budget in half would go a long way to eliminating the structural deficit.

    It forces us to remind ourselves that we want to be Canadians that believe in peaceful solutions rather than aggressive first strikes.

  • @Liam:

    I’m not sure but I think Canada is spending below the NATO average. I don’t think cutting DND by 50% is realistic, and you have to consider reaction from our allies.

    However, my MP Peter Stoffer has pushed the idea that we spend that money in Canada where possible, and build navy ships according to a schedule such that domestic shipyards are kept at some level of employment more or less consistently. This is different from ramping up to build a batch of frigates, then letting the industry deteriorate, boom, bust, boom, bust. I think this is how other nations (northern europe maybe?) already do things. Makes sense to me.

    BTW, your $30B figure contradicts the content of this post ($18.8B) – link to your source?

  • I wonder, would the Toires have made all the tax cuts they made given the crisis that was on the horizon. I am not suggesting that they knew this crisis was coming, but I know a whole lot of people were yelling fairly loudly that manufacturing was taking a beating and the dollar was doing Oil trading forward and backward flips at the time.

    For the size of tax cuts they made and the seemingly precariousness of the economy- there is a smell that they were cutting the ability to fund programs and reduce the size of government by sheer brute force alone. I am sure those on the right are loving this downturn as now it will make the size of government even smaller than originally planned.

    Where they will cut, I am sure has been planned out long ago- they will just now have to swing the axe harder and faster.

    I would agree with Erin that the Provincial space is the one to watch, but don’t count those tories on the hill out yet- they could surprise us, as the talk of cuts seems to be forthcoming on a daily basis in Ottawa.

    I think we need to look in Obama’s direction of wherte to raise some cash. Financial institution taxes seems like a great place to start- banks again are quite profitable and despite our banks stating they were quite resilient in weathering the crisis, there sure was a whole lot of funds in Canada transferred to the financial sector in the form of Asset backed paper defaults and a few other vehicles. I have yet to see a quite independent report on what occurred in the Canadian financial sector.

    If you want to grow our way out of this then we need to start priming the investment pump within the private sector. There are new markets and possibilities as we grow into this new green economy. It will take public money to lay the foundations of this economy. I don;t understand why economists are not preaching more on the role of government in helping this sector.

    If we would have waited for Henry Ford to build the roads and bridges I am sure we would still all be in horse and buggy. There is a public good issue that many are missing on the green economy, so I would be gearing up for transfer of investment into this sector and targeted tax incentives are one way to achieve this.

    I find all the talk of cutting and balancing budgets so premature and is only promoting the discourse on it, however I guess the reality is, those leading the herd to the next dry hole will do it no matter how much you tell them there is no water in that direction.

    paul t

  • Yes Erin, higher interest rates would lead to higher government debt payment which typically lead to government paying the principle of the debt down quicker. Leads boring sustainable growth. Not this speculative boom and bust we go through.

    This is a problem that will develop even if we don’t raise rates now but later with more debt-loads, hence the problem is bigger. When does it become convenient to deal with it, when is it not premature.

    The only reason inflation isn’t a problem is as I wrote on in august 30/09 in these forums about the unprecedented dollar strength that would occur.

    This has all happened despite lower interest rates while supporting a unsustainable recovery which you cant blame capitalism for. So 3 years if we still, have lower interest rates and fiscal measures abroad. I ensure inflation will be more of a problem if we ever get a sustainable drop in our currency with lower interest and higher debt loads.

    Actually the dollar strength is forcing our central bank to take a position. I think in years to come people will praise our central bank tightness approach in Q4 of this year. Just like economists called for Paul Vockler to be impeached at the peak of his unprecedented actions by modern day economists. If Carney wants to, he can take the punch bowl away. If he does I support.

    I just don’t see an exit strategy a couple years from now if every year between now and then were lowering the interest rate and stimulating the economy with new measures.

    Specific examples of capitalism as follow technology, eye Lasik surgery, Cosmetic Surgery. It would be hard to imagine anything we use daily in these areas to have happened if it was regulated like banking. Consider giving tech companies billions in subsidies or taxpayer paying for boob jobs. So the government stays out, yet quality goes up and prices come down ever year, impossible. The reason there is little regulation in these markets is because there is not one drop of taxpayer dollar.

    Yet the banking and housing crisis was a result of government guarantees in housing and banking through the removal of glass stegall banking act and the community reinvestment act, the lower interest rates and freddy mae and freddy mac. These markets by definition and compared to cosmetic surgery, eye lasik surgery, or technology are not capitalist but a mixed form of socialism that ensure a private-public partnership and economically reminiscent of policies used under fascist Italy during there crisis.

    Personally the underlying problem is inflation because of the span of my grandmother, parents and myself prices have incrementally risen eventually that in itself is unsustainable.

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