Cut spending now; Finance Minister Jim Flaherty has been putting off the tough decisions needed to balance the budget

Finance Minister Jim Flaherty recently indicated that the upcoming federal budget will present a plan to balance the budget, something he called very important in attracting investment into Canada. The Finance Minister has also gone on the record saying the government plans to focus on eliminating the deficit and begin reducing government debt rather than continue on the current path of spending

Thankfully, the Finance Minister appears to have grasped the urgency of this matter. But while his proposed course of action is welcome and economically sound, it's not clear that the soon-to-be-released federal budget will actually follow this path.

The government's current plan, as outlined originally in the 2010 budget and updated in the fall of last year, takes a much less assertive approach to eliminating the deficit. Indeed, the current plan sees deficits continue through to 2014-15.

All told, the federal government expects to rack up nearly $110-billion in debt due to deficits from the current fiscal year through to 2015-16, when the federal government finally expects to record a small surplus. As a result of these annual deficits, the federal debt will swell to $626-billion in 2014-15 from $464-billion in 2008-09, a nominal increase of 35%.

The culprit behind these continued deficits is the government's unwillingness to address spending. Rather than cut spending in order to place the federal budget on a more direct path to balancing it in the near term, the federal government continues to rely on the hope that it will be able to constrain (not reduce) spending in the future, that tax revenues will rebound, and that interest rate increases in the future will be moderate.

In other words, rather than take direct action to eliminate the deficit, the federal government has been satisfied to delay tough decisions now in the hopes that a whole series of things like taxes and interest rates will fall into place in the future. But as everyone knows, tough problems are not solved by deferring the difficult decisions to the future.

Government spending is set to decrease slightly next year (2011-12), by $1.7-billion or less than 1%, but it will start increasing again for each of the final four years of the government's current fiscal plan.

The key to the balanced budget projected by the government is the slowing in the growth of spending coupled with a marked rebound in revenues.

However, the government's track record on spending does not provide confidence in its ability to slow spending growth. Consider that in the years preceding the recession, the Conservative government increased spending from $209-billion in 2005-06 (the Liberals' last year in office) to $239-billion in 2008-09, an increase of nearly 15% over three years.

Then came the recession and from 2008-09 to 2010-11 federal spending increased by $39-billion as a result of the government's stimulus package and other spending increases. It is expected to reach $278-billion by the end of this fiscal year (2010-11).

Unfortunately, while this massive increase in spending due to stimulus initiatives was supposed to be temporary, the high level of spending in 2009-10 is set to become the new foundation for future budgets.

By 2015-16, spending will be $25.5-billion (9%) higher than it is this year (2010-11) and 45% higher than it was when the Conservative took office in 2006.

On the other hand, revenues are expected to rebound this year and continue to grow at a robust average rate of 5.8% until 2015-16.

The bottom line is that the government's current plan to return to balance is based on slowing the growth of federal spending increases over the next five years, while hoping revenues catch up as the economy continues to recover.

Interestingly, when the plan was announced in last year's budget, The Globe and Mail noted that the Conservatives had launch[ed] an age of austerity. The National Post applauded the plan as a genuine effort to restore balance to the nation's books.

Forgive us for being a little more realistic, but the current plan calls for spending to increase at a rate less than population growth and inflation in every year between 2010-11 and 2014-15, something the Conservative government has not managed to do in the five years it has been in office.

A true austerity plan aimed at balancing the budget would have taken a page from former prime minister Jean Chretien and finance minister Paul Martin's 1995 plan. The reforms by Chretien/Martin eliminated a deficit much larger than the current one (4.8 % of GDP compared with 2.8%), within three years.

Chretien and Martin's 1995 plan proposed cutting program spending by almost 9% over just two years to get a handle on federal spending. These weren't reductions in spending growth. These were actual reductions in spending.

Even more impressive is that Chretien and Martin outperformed their goal and reduced spending by 9.7%.

This represented a remarkable fiscal transformation that, in part, made Canada the envy of the developed world. Spending reductions, balanced budgets, and debt repayment contributed to our outstanding economic performance from 1997 to 2007.

To emulate this success, Canadians need a serious commitment to balancing the books. The sooner the government gets its fiscal house in order, the sooner it can take action to reduce taxes and improve the country's competitiveness. To that end, Mr. Flaherty should put forth a true austerity budget that actually cuts spending to balance the budget over the next two years.