Conservatives’ Economic Vision for Canada is Hardly conservative - Niels Veldhuis and Charles Lammam

As expected, the recent 2015 federal budget had the general feel of an election budget, with a small surplus and a smattering of initiatives to satisfy various voting groups. As Liberal leader Justin Trudeau noted in the House of Commons, “The budget is a political document produced to that end. It is a vision for a Conservative election campaign.” While many, including Trudeau, have tried to paint the Conservatives as radical, the 2015 budget actually points to a different conclusion. When it comes to the size and scope of the federal government, it’s hard to distinguish the 2015/16 Conservatives from the 2005/06 Liberals.

Let’s start with the most important measure of the size of government: spending as a share of the economy. Federal program spending (total spending minus interest payments on the federal debt) as a share of the economy (GDP) was 12.6 percent in 2005/06, the last year the Liberals were in office. On this measure, the federal government grew in the first three years under the Conservatives (2006/07 to 2008/09) before skyrocketing during the recession. Federal program spending now stands at 12.9 percent of GDP with the Conservatives planning to increase it to 13.2 percent this year (2015/16). Simply put, the Conservatives have increased the size of the federal government, and if re-elected, plan to keep the federal government larger than the previous Liberal government. Conservatives’ Economic Vision for Canada is Hardly conservative Niels Veldhuis and Charles Lammam FRASER INSTITUTE RECENT COLUMNS APPEARED IN THE FINANCIAL POST Summer 2015 | 21 Moreover, when provincial and local governments are added, total government spending in Canada is currently about 40 percent of GDP.

In a recent book, Measuring Government in the 21st Century, Lakehead University Professor Livio Di Matteo examines a wide range of international data to measure how the size of government affects economic growth and social outcomes. Di Matteo finds that economic growth is maximized when total government spending is at approximately 26 percent of GDP, and for social outcomes there is little additional benefit once government reaches 30 to 35 percent of GDP. A truly conservative vision for the federal government would recognize that it is in the best interests of Canada’s economic and social health to reduce the size of government—not increase it.

 A deeper look at the composition of federal spending tells a similar tale. There has been little change in the composition of federal program spending since 2005/06 across the three major categories (direct federal government spending, transfers to persons, and transfers to government). Today, the federal government’s direct spending is a little lower as a portion of the total while transfers to Canadian families and other levels of government are a little higher. Specifically, direct federal spending decreased from 47 to 44 percent of the total; major transfers to individuals and families increased from 30 to 31 percent of the total; and major transfers to other levels of government increased from 23 to 25 percent of the total. Again, when we consider the composition of federal spending, there’s only a marginal difference between the 2005/06 Liberals and the 2015/16 Conservatives. The one big difference between 2005/06 and 2015/16 is on the revenue side. Federal revenues as a share of the economy are now smaller (14.5 percent) than in 2005/06 (15.9 percent). The main reason for this decline is the Conservatives’ two-point reduction in the GST and, to a lesser extent, the general business tax reduction from 21 percent to 15 percent (an extension of the Liberals’ reduction from 28 percent).

The Conservatives were able to reduce taxes and increase the size of the federal government (program spending as a share of GDP) for two reasons. First, interest payments on the federal debt decreased due to substantially lower interest rates. Second, the Liberals consistently overtaxed Canadians by running significant surpluses. The distinguishing difference between the Conservatives and Liberals is that the Conservatives ended the practice of over-taxing. But as for further tax reductions, the Conservatives’ 2015 budget hardly lives up to its own name: Low-Tax Plan for Jobs, Growth and Security. The budget is actually set to increase the federal tax burden. There is little question that Canada would benefit from a more focused, smaller federal government, which would allow for personal income tax rate reductions that lead to positive economic results by providing better incentives for skilled, educated, and hard-working middleincome Canadians. Former Prime Minister Paul Martin and current Prime Minister Stephen Harper seem to agree on that point. Paul Martin highlighted it in 2005 when he said, “Lower personal taxes would also provide greater rewards and incentives for middle-and high-income Canadians to work, save, and invest.” Prime Minister Stephen Harper made much the same point in 2007 when he said, “Canada needs lower personal income tax rates to encourage more Canadians to realize their full potential.”

Regardless of the rhetoric surrounding the federal budget, it seems that the Liberals and Conservatives have more in common than they like to admit. NIELS VELDHUIS CHARLES LAMMAM Niels Veldhuis is President and Charles Lammam is Director of Fiscal Studies at the Fraser Institute