Jim Flaherty's budget test
By John Williamson
web posted February 18, 2008
Jim Flaherty has done a good job downplaying expectations in advance of the federal budget, which will be tabled in Parliament on February 26th. The finance minister has said there will be no new expenditures nor will he deliver meaningful personal income tax relief. This might be acceptable so long as he delivers on both sides of the ledger.
Suppose Canadians give Mr. Flaherty the benefit of the doubt and accept that his hands are tied. That the economic downturn in the United States will reduce Ottawa's tax base and the mighty surplus will evaporate. And perhaps many will agree a minority government makes it impossible for the Conservatives to cut government fat and eliminate waste. Maybe a status quo budget is sufficient.
Certainly, taxpayers can take some solace in recent tax cuts. The federal government rolled out a $60-billion package of broad-based tax cuts in October. It delivered substantial business tax relief, cut the GST to 5% and reversed the personal income tax rate increase Mr. Flaherty enacted in his first budget.
But ... if Mr. Flaherty's pledge to be fiscally "responsible" is to mean anything he must match his tax relief freeze with a corresponding spending freeze. Increasing spending while shunning tax cuts will mean the Conservative government has put the interests of the bureaucracy ahead of ordinary taxpayers. And if the size of the federal government expands, Canadians are unlikely to buy the government line that taxpayers must wait for income tax relief.
Voters are hoping the finance minister finally follows through on his budget rhetoric. From the beginning of the Conservative government's mandate Mr. Flaherty has vowed to control expenditures and spend responsibly. Taxpayers are still waiting.
When the Liberals left office total program spending stood at $175-billion (2005/06 fiscal year). The Conservative government's first budget called for Ottawa's spending to grow by 5.4% in fiscal 2006. Yet, at the end of that year government spending had instead ballooned an astounding 7.5%.
The 2007 budget plan announced an additional 5.6% spending hike. Once again spending has continued to creep upward throughout the year. Last month, the department of finance revealed expenditures had increased by 6.7% in the first eight months of the fiscal year (April to November). What fuelled the increase? The department says higher transfer payments, Crown corporation expenses, and operating expenses of departments and agencies. Translation: spending is up everywhere.
An example of lazy management is Ottawa's recent $1-billion plan to retrain laid-off workers and fund community infrastructure projects. (More federal bocce ball courts and canoe museums anyone?) Rather than reallocate from non-priority spending, like handouts to special interests groups or corporate welfare subsidies, the government decided it was easier to reach into the coffers and drive federal spending to new heights.
Toss in end-of-fiscal-year "March madness" spending and the federal government's annual outlays will -- for the first time -- break the 200-billion-dollar mark. How is this fiscally conservative or even "responsible?"
Mr. Flaherty is developing a reputation as being a big spending finance minister. Indeed, it is no contest between Mr. Flaherty and former finance minister Paul Martin over who is more fiscally responsible. It is Mr. Martin, by a long-shot.
Some might argue this comparison unjust since Mr. Martin tabled budgets in a majority government. As prime minister, Paul Martin was less "responsible" to be sure. During his two-year tenure he grew the size of government by 14%. And how much has government grown under Stephen Harper and his Conservatives in the same timeframe? It is -- surprisingly -- also 14%.
Looking ahead, Mr. Flaherty can continue mouthing empty rhetoric about controlling spending or he can start delivering. After two strikes it is hoped his third budget will finally deliver a dose of fiscal responsibility. If the Conservatives exercise even modest spending restraint they will be able to deliver meaningful personal income tax relief next year. The decisions Finance Minister Jim Flaherty makes in the upcoming budget will determine the size of tomorrow's income tax cut. He should hold the line on spending, and taxpayers will thank him if he does. 
John Williamson is federal director of the Canadian Taxpayers Federation.