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.