Government getting bigger and bigger in Canada

As Ottawa and the provinces roll out spending programs in response to COVID-19, much is being made about the growing size of government in Canada. Government spending levels, along with associated deficits, have reached historic highs across the country. However, research reveals that even before COVID, government spending was growing in Canada at a rate that should concern Canadians.

As noted in a new Fraser Institute study, between 2007 and 2018, government spending (as a share of the economy) increased for the country as a whole and in eight of 10 provinces. Over that time period, this measure of the relative size of government in Canada increased from 37.4 per cent to 40.3 per cent. (Remember, this is before COVID and the recession.)

In fact, the overall relative size of government in Canada significantly exceeds estimates of what’s considered an optimal size for maximizing economic growth. An earlier study of OECD countries found that government spending of approximately 26 per cent of GDP maximized economic growth. As that percentage increased, the rate of economic growth declined consistently.

In other words, the economies of the industrialized world tended to grow fastest when government spending was around 26 per cent of the economy. Again, the size of Canada’s pre-COVID government spending was 40.3 per cent of the economy, well above the optimal level.

Why would government spending have such an effect?

What we observe internationally is that many countries have insufficient government, meaning that basic functions of government such as independent courts, effective policing and basic universal education are absent. The absence of such services impedes economic and social progress. When governments provide these necessary services, implying that government spending as a share of the economy increases, so too does economic growth and social progress.

However, going beyond optimal levels (26 per cent to 30 per cent of the economy) usually entails government becoming active in areas where its efforts are counterproductive to growth. For instance, governments increasingly focus on redistributing income from certain groups to others, rather than incentivizing economic growth, and many begin favouring certain industries and sectors of the economy through corporate welfare and protectionism, all of which slow economic growth.

To be sure, governments have other legitimate priorities besides maximizing economic growth. However, economic growth is an important priority given the linkages between a growing economy, higher living standards and greater overall prosperity. Moreover, economic growth generates tax revenues that finance government programs (health care, for example).

Finally, a growing size of government produces deficit-spending and increasing debt. Increased debt today means higher taxes tomorrow. With Canada already being a high-tax jurisdiction by many measures, additional taxes hikes will further harm the competitiveness of domestic businesses and discourage investment.

Currently, all provinces are running budget deficits, adding debt and increasing spending. Combined with a shrinking economy, the result is increasingly large government spending relative to the economy. While a portion of the increased spending in 2020 was necessary to deal with public health and the recession, the evidence is clear—if we continue the decade-long trend of growing the size of government in Canada, we will impede rather than foster economic growth and prosperity for Canadians and their families.