Canada’s Incredible Shrinking Government

I recently had occasion to re-read Jim Stanford’s contribution to an excellent CCPA book on Paul Martin’s Record (Hell and High Water), in which Jim pointed out that fiscal retrenchment in Canada under the Chretien government had been far, far more severe than the OECD norm.

Few Canadians seem to perceive just how exceptional Canada has been compared to the international norm in terms of the ongoing tilt to spending cuts and tax cuts – even if we compare ourselves to the US. The trend has continued, even after the period of deficit fighting has ended.

Consider the following – drawn from Annex Data Tables 25 and 26 in the most recent OECD Economic Outlook.

Total Canadian government revenues have fallen by almost 4 percentage points of GDP, from a peak of 44.2% of GDP in 1992 to an estimated 40.5% of GDP in 2006. Over the same period, total government revenues actually rose slightly as a percentage of GDP in the OECD area as a whole (from 37.8% to 38.6% of GDP), in the Euro area, and even in the US (from 32.8% to 34.2% of GDP.)

Total government spending in Canada has fallen by an astonishing more than 10 percentage points of GDP, from a (recession-bloated) high of 53.3% in 1992 to an estimated 39.5% of GDP in 2006. For the OECD as a whole, the decrease was far, far smaller – from 42.4% in 1992 to 40.6% in 2006. Spending cuts in Canada have been much deeper than in the US (where total spending has fallen from 38.5% of GDP in 1992 to 36.5% in 2006.)

We on the left often like to think of Canada as somehow intermediate between the US and European social democratic “models.” Yet, when it comes to the basic fiscal hydraulics of tax and spend which support decent social programs and public services, we have tilted decisively to the US low tax/low spending side of the spectrum. And this cannot be attributed to the need for fiscal consolidation and dealing with the high deficits of the early 1990s.

Since 1997 – when the federal government’s deficit was eliminated and the provinces had moved much closer to balance – total Canadian government spending has fallen by about 4 percentage points of GDP to finance an equally large reduction of fiscal capacity. (Spending fell from 44.3% to 39.6% of GDP, while total government receipts fell from 44.5% to 40.5% of GDP, 1997-2006.) Believe it or not, total government spending in the US actually rose over this period, and taxes fell only slightly.

Canada’s levels of taxation and expenditure used to be not too distant from the European norm. We have, however, converged decisively with the US over the past decade, mainly because our governments have cut taxes and slashed programs with much greater resolve than has been shown even South of the border.