Goodale vs. Flaherty: Who Would Shrink Government More?

Although it was probably overshadowed by the census release, Ralph Goodale appeared to jump on Marc’s deficit bandwagon last week. Some paragraphs in the early portion of his National Post op-ed seemed like they belonged on this blog:

He [Harper] has taken this nation to the brink of a deficit – the first in more than a decade. And it’s deliberate. It’s his ideological obsession to stop the federal government from being an instrument for good in the lives of ordinary Canadians.

. . .

[Canadians] won’t like Mr. Harper’s way of avoiding his self-inflicted deficit. He will slash federal programs and services and say the “deficit-devil” made him do it.

However, the wheels come off when Goodale puts forward three ways in which Conservatives debilitated federal finances:

First, always preoccupied with short-term election positioning above all else, the Conservatives have become very big spenders. Their budgets have ballooned by more than $40-billion in just over two years. Stephen Harper is today the biggest spending prime minister in history . . .

So Goodale’s analysis is that the Conservatives massively increased federal spending to create a deficit to justify cutting federal spending? Wouldn’t it have been easier to just not increase federal spending in the first place? More spending hardly sounds like a recipe for shrinking the state.

Of course, it is conceivable that the Conservatives increased certain types of spending to create a deficit to justify cutting other types of spending. Some progressives would describe higher defence outlays in these terms. However, Goodale does not make this point or identify any other particular area in which he thinks the Conservatives overspent.

As far as I can tell, “more than $40-billion” is the difference between $175 billion of actual federal spending in 2004-05 or 2005-06 and $218 billion of projected federal spending in 2009-10. It consists of approximately $10 billion more in transfers to persons, $10 billion more in transfers to provincial governments, and $20 billion more for federal programs.

These increases do not even keep pace with half a decade of economic growth. In 2004-05, total federal expenditure was 13.7% of GDP. In 2009-10, it is projected to be 13.2%.

Of course, Goodale could argue that in his final fiscal year as Finance Minister (2005-06) he wrestled federal spending down to 12.8% of GDP. However, he cannot have it both ways. Is his position that Liberals would spend more or less than Conservatives?

The op-ed continues:

Secondly, the transparent safeguards that were previously built into federal financial projections have been abandoned. Even the most basic “Contingency Reserve” has been eroded.

However, this development is not a cause but a symptom of the tighter budget balance. If the Conservatives had more revenue or less spending, then they would have continued budgeting $3 billion of annual debt repayment. The real issue is that they no longer have the money following a decade of deep tax cuts. Goodale almost makes this point:

Thirdly, with respect to tax cuts, Mr. Harper chose to concentrate on the GST – where his cutting does the least amount of good and costs the most. The saving for the average Canadian is less than a dollar per day, but the impact on the Treasury is about $13-billion every year. It does nothing to improve tax fairness, disposable incomes, household savings, productivity or competitiveness. And it’s so costly, it crowds out other more helpful tax reductions.

It is not true that the Conservatives concentrated on the GST. When fully implemented, the corporate tax cuts (which the Liberals proposed) will cost more than the GST cut.

Goodale’s argument that the GST cut “crowds out other more helpful tax reductions” implies that he would instead have cut corporate or personal income taxes even deeper. Whatever the supposed merits of cutting income taxes rather than the GST, both entail the same immediate fiscal cost.

To meaningfully improve the budget balance, it would be necessary to retract some of the announced tax cuts or raise other taxes. Goodale has proposed neither, so we are left with the notion that he would somehow eliminate the modest spending increases budgeted by the Conservatives.

PS – Flaherty’s lame response characterizes Goodale as a free-spender who would increase taxes. As Henry Kissinger said of the Iran-Iraq War, “Too bad they can’t both lose.”