Budget 2011: Smells like 1995

Back in 1995 Finance Minister Paul Martin introduced a budget that reshaped fiscal federalism and retrenched the scope of the welfare state in Canada. It envisioned a dramatically smaller role for the federal government, a role that was permanently in question through the process of ongoing program review. It was Paul Martin’s permanent revolution, for the federal public service.

Today’s federal budget, the sixth tabled by Finance Minister Jim Flaherty, brings back the revolution.

Derailed by a global economic crisis in 2008, the Harper government is back to conservative basics – smaller government. But it’s not just smaller. It’s a different type of government, with lots more muscle behind the military and police security, less behind the programs that support human development.

Today’s Budget Plan lays out a long term fiscal plan that arrives at surplus budgets by cutting the size of the government and increasing federal revenues as a share of GDP.

Federal total program spending drops from 16% in 2009-10 to 12.9% in 2015-16.

The only other example of such a sharp contraction in federal program spending, since the demobilizing which took place at the end of the Second World War, was what happened in the wake of the 1995 budget cuts.

Paul Martin’s 1995 budget saw federal program spending as a share of GDP drop from 16% in 1994-95 to 12.7% in 1998-99 – almost identical to what Flaherty is now proposing. It fell further, to 12.1% by 2000 largely because of extraordinary growth in the economy.

The current projections are overstated, meaning that program spending as a share of the economy will fall even further than forecast in this Budget. That is because Budget Plan 2011 includes a status quo assumption about increases in the Canada Social Transfer and the Canada Health Transfer to the provinces. The latter grows at 6% a year until 2013-14, something that the Harper Team has made clear isn’t going to be a feature of any new deal with the provinces and territories. Yet for the last two years of this budget plan the transfers increase at existing rates of growth.

Budget 2011 restrains federal program spending exclusively through cutting direct program expenses. Here too, there is a major sleight of hand.

Strategic program review lops$6.2 billion from direct program spending in the next four years, as noted in Table 5.1. That same table references another budget-cutting process (Targeted Strategic and Operating Review Savings) which envisions savings of roughly $4 billion a year when fully implemented, totalling $11 billion over the next few years. These savings are not incorporated in the program expenses outlook, which means that program expenses as a share of GDP will be even lower than appear in Table 5.8.

The new program review process would require all departments to submit two budget plans, one identifying how it would cut 5% of total departmental spending, and another identifying how it would cut 10%. These plans would be submitted to a new special sub-committee of Cabinet, led by the President of Treasury Board and supplemented by external experts.

These experts will be identified and announced by the Prime Minister in the “near future”, according to the bureaucrats at the budget lock-up. This process is nowhere referenced in the budget documents.

This group – the highest ranking elected officials and their non-elected allies – would decide which departments would be cut and which would be saved. Depending on whether your line of service is in favour or not, the cuts could be minimal or heavy-hitting. Any department on the wrong side of the PMO could find its budget dramatically downsized in the span of a few years. Human Resources and Skills Development is already targeted to lose $495 million in the next few years simply through existing Strategic Review “savings”.

On the other side of the ledger, Budget Plan 2011 sees revenues grow as a share of GDP from 14.3% in 2009-10 to 15.1% by 2015-16.

By 2015-16 personal income taxes are forecast to grow by 46%. In comparison, corporate income taxes grow by 28%. The following table shows the different components of federal revenue.

By 2015-16 the corporations will be contributing a smaller share to overall federal revenues (12.6%) while the share paid by personal income taxes will have grown to almost half (49%)

When the Conservatives came to power personal income taxes provided 46.8% of all federal revenues, and corporate income taxes provided 14.3%. (Taken from the Fiscal Reference Tables)

The first year in the fiscal reference tables, 1961-62, shows that personal income taxes accounted for 31.5% of all federal revenues, and corporate income taxes 20%.