Ottawa must act now to ensure budget deficit doesn’t become permanent

| February 14, 2012 | 0 Comments

 Economist offers prescription for eliminating government deficits

There is a real risk of permanent deficits and accumulating debt

 

Troy Media – by Jason Clemens

Canadian governments are facing a 4.2 percentage point budget deficit by 2040, which is roughly $67 billion in today’s money, due to a combination of lower tax revenues (borne from slower economic growth) and higher spending on age-related programs and healthcare in the future.

 

 

Canadian governments can act in a proactive manner now or in a reactionary mode later, but they will have to act. The policy options available are fairly simple: (1) raise taxes, (2) cut spending, (3) increase debt, and/or (4) introduce reforms that increase economic growth.

Need changes to immigration system

Ragan suggests a number of policy changes that could contribute to narrowing the gap. We should not underestimate the impact of these changes or ignore them simply because they may not solve the entire problem. Indeed, many of these policy reforms make sense in and of themselves without considering their contribution to eliminating the future deficit.

In brief, Canada should pursue changes in the immigration system that (a) better ensure workers coming to Canada have their credentials recognized, (b) facilitate a process for private companies to more easily bring in needed foreign workers, and (c) that a higher percentage of total immigration is work-related rather than based on family re-unification. Increasing the likelihood of productive and working immigration can contribute to a broad solution.

Similarly, there are changes in a host of labour market programs that could be implemented to encourage and increase overall labour market participation. Reforms to Employment Insurance, reductions in marginal effective tax rates for low- and moderate-income families, more generous treatment for child-care related expenses, and greater flexibility with respect to receipt of retirement benefits could all facilitate improvements in labour market participation.

These and other policies discussed by Ragan can mitigate the expected gap between future government revenues and spending. It will not, however, close the gap, leaving a real risk of permanent deficits and accumulating debt.

One measure that would mitigate spending while encouraging more seniors to remain in the labour force longer is increasing the age of eligibility for both early and standard public retirement programs. Programs and transfers aimed at low-income seniors like GIS should be exempt since changing the age of eligibility would only shift costs from the federal government to the provinces. There is a direct link between the projected deficit and the increase in life expectancy. For example, life expectancy for males born in 1966 when the Canada Pension Plan (CPP) was introduced was 69 (four years of benefits). It is now roughly 79, which represents a marked increase in the cost of benefits.

Raising the age of eligibility for public retirement programs like the CPP to 70 over the next two decades is a reasonable response to the demographically-based deficit. A slow approach to increasing the age of eligibility could be made, perhaps by one month each quarter for the next two decades (four months per year), which means no disruption for those in retirement now and a gradual approach over time that mitigates disruption for older workers.

Reforming Canada’s health care system to ensure better value-for-money also has to be part of the solution. To begin such a process, the federal government should rely on the lessons from welfare reform in the 1990s. The federal government reduced transfers to the provinces while according them more flexibility in delivering social assistance by eliminating most national standards. The result was an explosion of experimentation and innovation across the provinces with a determined focus to actually deal with the underlying problems of dependency rather than simply throwing more money at it.

Health care reforms

The same framework would work for healthcare. The federal government could reduce transfers, even slightly, while affording the provinces greater flexibility to innovate and experiment in the design, regulation, and delivery of healthcare within a universal, portable framework. Such a reform would begin the process of improving the nation’s health care system.

Once such a framework is established, the key for the provinces will be to learn lessons from other universal health care countries that spend the same or less than Canada but enjoy better results. Particular focus should be on countries like Switzerland, Sweden, and Australia.

The focus of the remaining measures should be on how to reform and reduce spending. The framework for such a review is best provided by the federal Liberal government’s experience with Program Review in 1994. In the review, no area of government spending was protected. Everything the government did was reviewed.

The government applied six tests to evaluate spending:

1) Serve the public interest.
2) Necessity of government involvement.
3) Appropriate role for the federal (or provincial) government.
4) Scope for public/private partnerships.
5) Scope for increased efficiency.
6) Affordability.
 
Relying on these tests to rationalize and reform spending at the federal and provincial levels will ensure that savings are achieved but also that such changes are done in a prioritized, methodical manner.

One cannot reasonably evaluate the solutions available for the coming fiscal gap without also discussing taxation. Two points are important to consider. First, the Canadian tax system has become much more complicated over the last decade. A myriad of new tax credits have been introduced covering things like trades people’s tools, children’s fitness, employment, and children generally. The cost of tax expenditures has increased by more than 42 per cent since 2001.

Simplify the tax system

A better approach to taxation, and one that could increase rates of economic growth by improving incentives for work effort, investment, and entrepreneurship, is to simplify the tax system by eliminating many of these tax credits while lowering marginal tax rates.

If the combination of these policies still fell short of solving the projected deficit, which is highly doubtful, any additional tax revenue raised in the form of actually increasing tax rates should be reserved exclusively for the GST. The GST, or now HST, is, if not the best, one of the best taxes in the country due to its efficiency and simplicity. Put differently, relying on the GST for additional revenues would impose the least costs on the economy.

However, the combination of policies summarized above coupled with the spending reductions and reforms should more than suffice in eliminating the long-term budget gap between government revenues and spending without increasing tax rates.

 

Tags: ,

Category: Canada

About the Author (Author Profile)

Leave a Reply