The following op-ed appeared
in the Waterloo Region Record, March 16th, 2017 and the New
Brunswick Telegraph-Journal, March 13th, 2017.
The upcoming federal budget
comes in Canada's 150th year — an important milestone for what is perhaps the
most successful country in the world. The evolution of federal finances since
1867 reflects a changing economy and offers important lessons regarding the
perils of persistent deficit spending and growing indebtedness.
Canada's federal government has
indeed grown. In 1867, it had a budget of $14 million, an expenditure-to-GDP
ratio of approximately five per cent, a net debt of $75.7 million, and a net
debt-to-GDP ratio of 20 per cent. Transportation, communications and economic development
accounted for a quarter of federal spending, and transfers to other governments
20 per cent. Meanwhile, debt service charges were 27 per cent due the newly
formed federal government assuming provincial debts. There were no transfers to
persons.
By comparison, total federal
government spending in 2017 is estimated at $331 billion with an
expenditure-to-GDP ratio of nearly 16 per cent and a net federal public debt of
$760 billion, resulting in a debt-to-GDP ratio of 36 per cent. Assorted
transfers to persons and other levels of governments now account for nearly
two-thirds of federal government spending.
Until the First World War,
customs duties dominated federal government revenue. The war effort sparked the
search for new revenues leading to the creation of the first personal and
corporate incomes taxes and the first federal sales tax. Over time, the
importance of these three new revenue sources grew, and in 2017 it's
anticipated that the personal income tax alone will make up 51 per cent of federal
government revenue, with corporate taxes comprising 13 per cent and commodity
taxes (GST, excise taxes and customs duties) making up 17 per cent.
The 150 years since
Confederation have seen the federal government's primary focus transition from
the active economic development of a country grounded in liberal economic
principles to an activist role partly aimed at bringing about a more
egalitarian society via social spending. Despite the benefits, expanded federal
spending in the post-Second World War era — given the subsequent slowing of
economic growth, rising interest rates and the absence of more concerted fiscal
discipline — ultimately resulted in the 1990s federal debt crisis.
Prudent government spending is
useful, such as the construction of the transcontinental CPR railway where
subsidies encouraged the building of a risky transportation project. However,
the same strategy also saw over-subsidization of the CPR and substantial
subsidies to two other less-successful rail lines. More government spending is
not always better, and that also applies to deficit financing.
Over the period 1867 to 2017,
Canada's federal government ran a deficit nearly three-quarters of the time,
with the largest deficits-to-GDP ratios during the two world wars and the great
divergence between revenues and spending leading to the 1990s debt crisis.
Large deficits and interest rates greater than the economy's growth rate during
the 1970s and 1980s lead to a rising debt-to-GDP ratio and the federal fiscal
crisis of the early 1990s.
The important policy decisions
when it comes to spending are when to spend, what to spend, how much, and how
to pay for it. The wrong answer to any of these questions has negative fiscal
implications.
Given the surge in federal
deficit financing in the wake of the 2016 budget, one wonders if the lessons of
the 1990s have already been forgotten. While interest rates remain at historic
lows, economic growth is also low, making a case for fiscal prudence given the
dynamics of deficits and debt. The progress made in reducing the federal net
debt-to-GDP ratio below 40 per cent will be largely squandered if we allow debt
to once again grow uncontrollably.
