To: Canadians Concerned About Federal Spending
From: John Lester
Date: October 7, 2024
Re: ‘Pay-as-You-Go’ is a Far Better Policy than ‘Axe the Tax’
Pierre Poilievre has a slogan for fixing the budget: “Pay as you go.” It’s less catchy than “axe the tax,” but more likely to make Canadians better off. The Conservatives are pledging to balance the budget by reining in spending. A pay-as-you-go law would require new spending to be offset by reductions in existing spending.
Details of the spending cuts and the pay-as-you-go law are promised for the election campaign. Here’s some unsolicited advice on what the platform should say.
To begin with, a pay-as-you-go law presupposes the existence of a cap on spending that would force new initiatives to be funded through reallocations. As I discuss in a recent C.D. Howe Institute paper, this cap should be set out in election platforms so that voters have, as the Conservatives are wont to say, “a very clear choice” on government spending.
As part of their platform, the Conservatives could express the spending cap as a percentage of trend GDP. For example, they could commit to a track that would reduce program spending’s share of GDP to its pre-pandemic level. That would require reducing planned program spending by about $35 billion by 2028-29. Anyone worried this might be an unworkable constraint on policy flexibility should understand that it would cause real spending to edge down about 2 percent over the next four years. And the cap would exclude spending affected by the state of the economy, such as Employment Insurance benefits. There would also be exceptions for discretionary, time-limited increases to stabilize the economy in the face of a major economic downturn.
If they win the election, the Conservatives’ first budget should then present a more detailed, binding five-year spending plan. The cap should be an upper limit on spending expressed in dollar terms. It should have an additional exception for errors in forecasting the underlying determinants of spending under statutory programs, such as inflation and growth in the number of program beneficiaries. But new programs not included in planned spending would be subject to the pay-as-you-go legislation. They would have to be financed by reducing other spending.
To demonstrate the Conservatives’ commitment to controlling spending, their election platform should include specific measures that will lower planned spending by at least $7 billion annually by 2028-29. Pledging to scrap the ArriveCan app and the Infrastructure Bank is not enough. A good place to start when drawing up the expanded list is my recent paper on business subsidies. The federal government is currently spending $40 billion on such subsidies, up 140 percent since 2014-15, with another 25-percent rise projected by 2027-28. After analyzing these programs, I conclude four out of five dollars spent on business subsidies are wasted. It would not be hard to find $7 billion in savings that would make Canadians better off.
In cutting spending, the Conservatives should resist the temptation to spread the pain with across-the-board cuts. Their election platform should set out their overall priorities and commit to a thorough review of spending, with the goal of eliminating or modifying programs that do not provide value for taxpayer dollars or are inconsistent with the platform’s priorities.
It will surprise many people to learn that the federal government currently spends a lot on program evaluation. Unfortunately, those evaluations won’t be any help in a program review focused on value for money. Internal evaluations almost always assess effectiveness in terms of the response of program beneficiaries. For example, business subsidies are assessed by considering the responses of subsidized firms: Did investment, output and the number of jobs increase? That’s not much of a test. It would be astounding if firms didn’t respond favourably to a subsidy.
The question that should be asked instead is whether Canadians, in general, are richer or poorer because of the subsidy. That is, are taxpayers getting value for their money? Sadly, this question is rarely asked. I reviewed 48 evaluations prepared since 2020 in eight departments and found that only four went beyond assessing impacts on program beneficiaries to examine whether programs represented value for money.
Fiscal responsibility gets some airtime, but Pierre Poilievre wants to fight the election on “axe the tax.” That’s catchy but bad economics. Putting a price on fossil fuel emissions and returning the proceeds to consumers is an efficient way to reduce our carbon footprint. Axing the tax means either higher emissions or more expensive ways of reducing them.
But the Conservatives’ other promise of providing real choice on spending in the next election does offer the possibility of making Canadians better off. We should hold them to it and ask the other parties if they don’t like Conservative “austerity,” how would they achieve fiscal responsibility?
John Lester is a fellow-in-residence at the C.D. Howe Institute.
To send a comment or leave feedback, email us at blog@cdhowe.org.
The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.
A version of this Memo first appeared in the Financial Post.
