Rules Needed to Control Federal Spending

The Conservatives came into office committed to limiting the growth of government spending and reducing taxes. Regrettably, federal spending growth has not slowed and continues to impede the government’s ability to materially reduce Canada’s tax burden.

Just last week, former Liberal Finance Minister John Manley suggested the need for a new fiscal anchor in the post-deficit era including benchmarks for government spending in order to reduce taxes. As the 2009 federal budget approaches, the Conservative government would be well advised to heed Mr. Manley’s advice by implementing tried and tested spending rules.

The size and recent growth of federal government spending is startling. All told, the federal government expects program spending to reach $199.6 billion this year (2007/08), an increase of $24.4 billion or nearly 14 per cent from just two years ago. The rate of growth in spending is well beyond what was needed to compensate for inflation and population growth – the spending goal of the Conservative Party proposed during the election. More worrying is that the size of the federal government as a share of the economy is expected to increase from 12.8 per cent of GDP two years ago to an estimated 13.3 per cent of GDP this year.

Understandably, controlling the finances of a nearly $200 billion organization is a daunting task. Compound the size of the federal government with the unique incentives faced by those operating in the public sector and the task of controlling spending becomes that much more difficult.

Thankfully, two tried and tested rules-based solutions are available.

The first has been used by a number of governments both in and outside of Canada and indeed was trumpeted by the Conservative Party during the election. It is a rule (i.e. law) that would limit the growth in total government spending to population growth plus inflation. The result would be that per person spending by the federal government would increase at the rate of inflation.

To ensure the spending limit is followed, all federal ministries would be required to report quarterly on their spending performance. In addition, senior bureaucrats and ministers should have part of their compensation tied to performing within this rule. In fact, British Columbia undertook such steps in 2001 to rein-in government spending. Specifically, Ministers faced a salary holdback of up to 20 per cent if the ministries under their control overshot the spending targets.

Secondly, the federal government should consider Pay-As-You-Go spending requirements (or PAYGO for short) which were extraordinarily successful in the United States under President Clinton. PAYGO requires that any new spending programs must be financed by reductions in existing programs. The result is that existing spending is better scrutinized and reallocated to higher purposes when appropriate. A PAYGO rule would force the government to root-out low yield spending and would slow the growth in government spending. The Congressional Budget Office in the U.S. found that PAYGO rules contributed to the improvement of the government’s fiscal picture in the mid-1990s. In fact, the growth rate of U.S. federal government spending only exceeded population growth and inflation twice between 1993 and 2001.

To fulfill their commitment to limit government spending, the federal government should look to implement rules-based solutions. The result would be a better use of existing resources, and at a minimum, would slow the growth in government spending. Ultimately, taxpayers would receive better value for money as spending with low returns is eliminated and more fiscal room for tax relief is created. With federal program spending approaching $200 billion and Canadians paying nearly half of their incomes in taxes, the time has come to apply the spending brakes.