The Fraser Institute

The Fraser Institute

January 30, 2008 06:00 ET

The Fraser Institute: Governments Should Restrain Spending, Manage Debt, and Provide Tax Relief in Upcoming Budgets

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Jan. 30, 2008) - Federal and provincial governments must focus on tax relief and controlling debt, and not succumb to calls for increased spending as they prepare this year's budgets, economists at The Fraser Institute said today.

The Institute's warning, along with a series of budget recommendations, came as governments across Canada prepare to release their budgets for the coming fiscal year.

"The current calls for increased government spending will do nothing to alleviate the market uncertainty and will only saddle Canadians with continued high levels of personal taxes," said Jason Clemens, The Fraser Institute's resident scholar in fiscal studies.

"Now is the time for governments across Canada to act prudently by controlling spending and implementing incentive-based tax relief."

Control Spending by Implementing Limits

The first priority for Canadian governments should be to constrain the growth in spending by limiting it to the rate of population growth plus inflation, said Niels Veldhuis, the Fraser Institute's Director of Fiscal Studies.

"Unfortunately, the performance of Canadian governments in controlling increases in program spending over the past five years has been very poor."

In an analysis of government program spending growth that compared growth in program spending with the change in population plus inflation, Fraser Institute economists found that average annual increases in program spending over the past five years ranged from 4.3% in Saskatchewan to an astounding 9.9% in Alberta and Nova Scotia.

These increases were then compared to the increases in population and inflation over the same period. The result is that every government-federal and all 10 provincial governments-increased per person program spending after adjusting for inflation over the past five years.

The smallest average increases in per person program spending after adjusting for inflation were recorded by Quebec (1.7%), PEI (1.9%), Saskatchewan (2.4%) and British Columbia (2.4%). The largest average increases were recorded by Nova Scotia (7.5%), Alberta (4.9%), and Ontario (4.3%). The federal government ranked in the middle (in 6th place) recording an increase of 3.4%.

"The fact that every government in Canada has increased per person spending after accounting for inflation indicates the clear need for greater spending restraint, particularly as we enter a heightened period of economic uncertainty," Clemens said.

An alternative method to control spending increases is to use the rate of nominal economic growth (GDP). Over the past five years, only four Canadian jurisdictions-Newfoundland, Saskatchewan, Alberta, and British Columbia-have managed to limit program spending to less than the rate of growth in the economy.

British Columbia, Saskatchewan, and Newfoundland were able to reasonably control increases in program spending while benefiting from strong economic growth. Alberta, on the other hand, has shown almost no ability to control its program spending (average increases of 9.9% annually) over the past five years. The saving grace for Alberta has been its incredibly strong rate of nominal GDP growth, averaging 12.4% per year.

"Provinces enjoying strong economic growth while managing their spending, like Saskatchewan and British Columbia, can better weather economic slowdowns. Other provinces, which are recording unsustainable increases in program spending, will face enormous difficulty and strain if their economies slow," Veldhuis said.

Manage Government Debt

Clemens pointed out that increasing levels of debt require larger and larger resources to be spent on debt servicing charges, which reduces the amount of money available for program spending and tax relief.

"In a time of generally balanced budgets and interest rate stability, it is surprising that several Canadian jurisdictions are experiencing increases in debt charges over the past five years."

Specifically, Quebec, PEI, British Columbia, and Manitoba all experienced increases in the cost of servicing their debts over the past five years. The largest and most alarming increases were in Manitoba, where debt charges have increased by more than 125% to $835 million per year.

"Thankfully, seven of the 11 Canadian governments experienced reductions in debt charges over the past five years, which provides these governments with greater fiscal flexibility in the future," Veldhuis added.

Focus Tax Relief on Incentives

According to an analysis comparing budgeted to actual revenues over the past five years, Canadian governments have taken in significantly more revenues than they originally expected. Specifically, Canadian governments have collected a total of $98.8 billion in unexpected revenues over the five years 2002/03 - 2006/07.

"Higher than expected revenues indicate that many governments in Canada are in a position to implement some tax relief in the coming budgets despite increased economic uncertainty, particularly if spending increases are controlled," Veldhuis said.

"But any tax relief must focus on improving economic incentives and strengthening the Canadian economy, rather than simply redistributing current income," Clemens added.

Specifically, they suggested focusing on the following measures:

- Reduce personal income tax rates in order to improve the incentives for work effort, savings, investment, and entrepreneurship.

- Continue to reduce corporate income tax rates in order to make investment in Canada and the provinces more competitive internationally.

- Several provinces, notably BC, SK, MB, ON, and PEI, should move to harmonize their provincial sales taxes with the federal GST. Harmonization will improve the efficiency of the provincial sales taxes, reduce the compliance costs for businesses and individuals that collect the tax, and make these jurisdictions more competitive.

The Fraser Institute is an independent research and educational organization based in Canada. Our mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. We do not accept grants from governments or contracts for research. Visit www.fraserinstitute.org.

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