The Reform Party
Dissenting Opinion
Standing Committee of Finance Roundtable on
Budgetary Matters
Over the past months, the Standing Committee has heard from a large
number of witnesses. These witnesses, with notable exceptions, felt that
the deficit continues to be a serious problem that deserves greater
government attention.
The economist roundtable strongly recommended that the
government move beyond its present targets and aim for a balanced
budget. While there was no consensus on a time-frame, most felt that a
zero deficit by the end of the current mandate was desirable.
Setting the Stage
One of the problems with the committee hearings was that, unlike last
year, the committee did not hear from the Minister of Finance until the
hearings were nearly over. This meant that the consultation did not have an
adequate "reference point" on which to consult. There were no "goal
posts" to which witnesses could reference their comments. Last year, the
minister clearly laid out priorities and asked the committee to answer a
very detailed list of questions. This resulted in committee hearings that had
clear guidelines and meant that members of the committee felt that the
consultations were providing answers to crucial questions from the
Minster. In matters as important as the fiscal health of Canada, and to
ensure that future budget consultations are done in an atmosphere with
clear reference points and goal posts, we recommend that all future budget
consultations be kicked off by an appearance of the Minister of Finance
who will clearly define the terms of reference and provide specific
questions to be investigated by the Standing Committee on Finance.
Budgetary Targets
Press reports detailing so called "secret" International Monetary
Fund papers on Canada's fiscal situation suggest that Canada's fiscal
progress has been "unduly slow" (Toronto Star, Dec. 5, 1995). The
economist roundtable also confirmed that while the government has taken
some positive steps, it is far from finished. There are at least three
compelling reasons why the government must balance its budget before
the end of their current mandate:
- The Business Cycle. The economy is now at, or has just passed, the
peak in its business cycle. Much of the success in reducing the deficit in
the last two years has come from growth in the economy. Reductions in
UI payments, and higher tax revenues have contributed the lion's share
of deficit reduction in the past two years. A recession would
immediately reverse these favorable trends. In the 1990-91 recession,
federal revenues fell, and UI payments went through the roof. The
1995 budget made some structural adjustments to UI and CAP to
ensure that federal expenditures do not balloon in the same way in the
next economic downturn, but nothing the government has done can
protect it from a fall in overall revenues. For example, if the economy
went into recession in 1996-97, and federal revenues stayed the same
in that year as the previous year, the federal deficit would immediately
increase by $4.2 billion dollars. If revenues declined as they did in
1991-92, the deficit would increase even more. Clearly, the present
fiscal track does not adequately protect the government from this type
of event. This is foolhardy and short-sighted.
- The Political Cycle. This administration is now in the "second half" of
its mandate. This seriously constrains the difficult political choices
that must be made to intensify fiscal restraint. History is very clear that
governments that do not make progress on deficit within the first part of
their mandates are very unlikely to make significant progress as they
get ready to face the electorate. This political window is closing fast, in
fact, we fear that it may have already closed for a political party that has
not historically been known for spending restraint.
- Compound Interest. Interest is a nondiscretionary federal expense.
The federal interest burden seriously hampers the ability to fund
programs that government feels essential. In Canada, our interest
burden has risen faster than the growth in federal revenues for many
years. If the federal government were to balance the budget today, the
federal government could only deliver 65 cents in services for every
dollar collected in taxes. The remaining 35 cents is required to pay
interest. At the heart of the interest burden is the size of the federal
debt. As long as the debt grows faster than the economy, the proportion
of revenues available for programs will continue to decrease. The
government claims that reaching a 3% deficit target will mean that the
interest burden (and the federal debt to GDP ratio) will stabilize.
However, two preconditions must exist for this to be true. First, the real
rate of interest (interest minus inflation) must be smaller than the
growth rate. This has not happened in recent years, and appears
unlikely to occur in the immediate future due to continued fiscal and
political uncertainties. Second, the growth rate must be greater than
three percent (or at least federal revenues must grow faster than 3%).
The real growth rate has only exceeded 3% once in the last seven years.
We can only conclude that the present political and fiscal realities
dictate that a 3% deficit target is no guarantee of reducing or stabilizing
the federal interest burden. The government must go farther.
Losing Resolve
The Finance Minister announced that the target for 1997-98 would be
2% of GDP (or $17 billion). While some may think that this represents
important reductions, most analysts now suggest that this target can be met
with as little as $1 billion in additional spending reductions. This target
does nothing to address the aforementioned concerns regarding the
business and political cycle or the dangers of compounding interest. By
refusing to announce a date for balancing the budget, the minister has
delivered the worst of all worlds: painful spending reductions but no
prospect for interest rate or tax reductions that would come with a firm plan
to balance the budget.
Reform Alternatives
We feel that the Minister of Finance, after taking tentative first steps,
has lost his resolve. We implore the government to step up the pace of
deficit reduction and announce a target of 1.5% of GDP in 1997-98 and a
balanced budget in 1998-99. In addition, we suggest that the Minister
offer Canadians hope with the promise that budget surpluses generated by
economic growth in the following years be used to reduce taxes and lower
the national debt. Finally we would urge the Minster to initiate plans for the
introduction of a simplified, transparent, equitable and more efficient
system of taxation that also brings to an end the nightmare of the GST.
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