August 2008 Archives

Federal spending ballooning to unsustainable levels

Conservative government to taxpayers: We’ve given up trying to control spending

OTTAWA: The Canadian Taxpayers Federation (CTF) reacted today to the announcement that the federal government’s spending is ballooning to unsustainable levels. The finance department reported today in their June Fiscal Monitor that Ottawa’s expenditures grew by 11.1 per cent in June, and program spending swelled by an astounding 8.4 per cent in the first three months of the fiscal year. This increase is two-and-a-half times the 2008 budget’s spending estimate, which called for a 3.4 per cent boost to spending.

“Many Canadians were encouraged by the Conservative's apparent new restraint shown in their third budget that limited spending growth to 3.4 per cent this fiscal year. Well, so much for that. In the first three months, spending is instead up two-and-a-half times what these so-called fiscally responsible Conservatives in Ottawa budgeted it to be," said CTF federal director John Williamson. “The Conservatives continue to claim they will still hit 3.4 per cent in spending growth for the year, but they’ve proven throughout their term in office that they can’t stop themselves from spending.”

The Conservative government’s first budget called for Ottawa’s expenditures to grow by 5.4 per cent in fiscal 2006/07. At the end of that year government receipts had jumped by 7.5 per cent. The 2007 budget plan announced an additional 5.6 per cent spending hike. The real amount in 2007/08 was a 6.9 per cent increase.

Canadians were initially assured a Conservative government would be more disciplined. On November 23, 2006, Finance Minister Jim Flaherty scolded the previous Liberal government for spending tax dollars recklessly, telling Canadians, “The government is committed to keeping the growth of program expenses below the growth of the economy over the medium term.” In Parliament he repeated, “...our new economic plan proposes to keep the growth rate of program spending on average below the rate of growth in the economy.”

And why is this important? The minister provided the answer when he said, “To the extent spending growth is kept below the growth in the economy, this will contribute to further reductions in public debt and in taxes given the commitment to dedicate interest savings to tax reductions.”

Williamson concluded, “The message is clear. Tax and debt reductions are conditional on spending restraint. The Conservatives have gone on a spending binge that hamstrings their ability to lower personal income taxes and reduce debt.”

Please note that after six good years with the Canadian Taxpayers Federation, I will be resigning as federal director on Sept. 12, 2008, to undertake graduate studies in economics.

John Williamson
Federal Director
Canadian Taxpayers Federation

Jim Prentice, Canada’s Presumptive Finance Minister?

It is no secret in Ottawa that Industry Minister Jim Prentice wants to be Canada’s finance minister. Before the last Cabinet shuffle there was a quiet but steady effort to publicly highlight Mr. Prentice’s managerial talents and disparage Jim Flaherty’s reprimanding of high-taxed Ontario to change policies or risk becoming a have-not province. If Minister Prentice had his way he’d be running finance and Mr. Flaherty would be punted to a second-tier ministry, like industry. It didn’t matter that many mainstream economists agreed with Mr. Flaherty, Mr. Prentice was offering himself as a kindler, gentler Conservative.

Last week, the industry minister took another run at Mr. Flaherty by wading into budget territory. He told reporters the federal government has not determined how to allocate proceeds from the recent auction of wireless licences that resulted in an unexpected $4.25-billion windfall. Mr. Prentice said the cash might go to tax cuts, debt repayment or even spending programs. If Mr. Prentice is determined to audition for the finance minister’s job he might want to first reflect on the state of Ottawa’s finances. Because there should be no confusion in Conservative ranks about what to do with the revenue.

The finance department reported last Friday that Ottawa posted a deficit of $517-million in the first two months of the 2008 fiscal year. This news is worrisome even after a decade of Ottawa lowballing its surplus projections. It was no surprise that tax revenues dropped by 4.1% since the Conservatives cut the GST another point and lowered the tax rate on businesses. If Ottawa’s financial position is worsening it is the result of poor management and over-spending, not modest tax relief. The 2008 budget claimed Ottawa would limit spending growth to 3.4% this year. Yet, expenditures in April and May grew by 7%. If this continues, Ottawa will be on track to overshoot its budget target by an astounding 100%.

Do Mr. Prentice and his colleagues believe the federal government should increase spending further this year? And how important is reducing the federal government’s monster debt? Since 1997, the debt has been cut by $106-billion. That’s a good start. But each year $34-billion is still spent on interest charges to service Ottawa’s outstanding $457-billlion liability. That amounts to $93-million each day. There is clearly more work to do.

It is folly to suggest a one-time revenue gain – such as the $4.25-billion generated by the wireless auction – be used to increase spending. Whatever new program might be created will live long after the cash raised from the auction is spent. As Milton Friedman said, “Nothing is so permanent as a temporary government program.”

Whenever a government sells an asset – in this case wireless spectrum rights – the additional income should be used to reduce the country’s debt liability. Ottawa has the option of allocating the auction revenue at once or spreading it over a decade. The latter move would boost revenue by $425-million a year, however leaving this money on the table increases the likelihood that some of it will be spent instead of going against the debt.

Applying $4.25-billion to the debt will reduce interest payments by approximately $225-million every year. Under the Conservative government’s new tax-back guarantee law, all debt-interest savings are used to reduce personal income taxes. This is another good reason why the auction revenue should be used to retire the debt now. Debt relief today will result in lower taxes tomorrow.

Minister Prentice deserves tomatoes from taxpayers. He opened a discussion on increased spending where none is necessary and offered more evidence the federal government doesn’t tax to collect the revenue it needs but that politicians always find ways to spend whatever money is collected. Taxpayers can expect spending to spike unless the real Finance Minister, Jim Flaherty, is ready to overrule his Cabinet colleague, reduce debt and keep a lid on spending. If he does not, it won’t matter much to taxpayers which Jim is the finance minister after the next shuffle.

John Williamson is federal director of the Canadian Taxpayers Federation

END

Please note that after six good years with the Canadian Taxpayers Federation, I will be resigning as federal director on Sept. 12, 2008, to undertake graduate studies in economics.

John Williamson
Federal Director
Canadian Taxpayers Federation