In an article in iPOLTICS on October 31st, Elizabeth Thompson reported that Maxime Bernier – the Ted Cruz of Canadian politics - would present a resolution at the Conservative Party’s National Convention, which would introduce balanced budget legislation and freeze federal government spending at $300 billion beginning in 2016-17 and continue for the next four fiscal years.   This resolution was passed at the convention.  But did those who voted for this resolution have any understanding of what it means?

The motion to enshrine “balanced budget” legislation in the Conservative platform came as no surprise, as this had already been announced in the Speech from the Throne.  No detail was provided as to how this would actually work. In an earlier commentary, we raised several questions that would need to be addressed in designing any balanced budget legislation (“A Throne speech long on buzzwords, light on ambition” iPOLTICS October 17, 2013). It would be nice if Finance Minister Flaherty provided some background research and analysis for discussion in his upcoming fall economic and fiscal update, expected later this month. More than likely, this will not happen since they probably haven’t done the necessary research and analysis and even if they have, this government doesn’t normally release background material. If it were to happen it would likely appear miraculously in another budget omnibus bill.

But what are the implications of freezing total federal government spending at $300 billion to 2020-21?  In the March 2013 Budget, total expenses were projected at $304.2 billion in 2016-17 and $313.9 billion in 2017-18.  These projections will be updated in the upcoming fall update, along with a forecast for 2018-19. The Bernier proposal, therefore, would require additional spending cuts of $4.2 billion in 2016-17 and $13.9 billion in 2017-18, with increasing reductions in the following three fiscal years. The required reduction in 2017-18 is larger than the one-year cumulative restraint measures introduced since the March 2010 Budget.

No mention was made in the resolution as to where these reductions would come from.   This might have helped the discussion at the Convention. Total federal government expenses consist of four major components: major transfers to persons (old age security, employment insurance benefits and children’s benefits); major transfers to other levels of government (Canada Health Transfer, Canada Social Transfer, Fiscal arrangements, Alternative payments for standing programs, and Gas Tax Fund), direct program expenses (other transfers, Crown corporation expenses, and departmental and agency operating and capital expenses) and public debt charges.  

Public debt charges represent legal obligations to bond holders, so don’t expect any major changes there.  Savings would result from the freezing of total expenses at $300 billion as the government would need to borrow less from what is currently planned.  Savings could also be realized if the government eliminated its retail debt program, primarily Canada Savings Bonds, as has been recommended in the past as it is a very costly program to administer.  However, this is a political hot potato so don’t count on it.

Within major transfers to persons, the government has already changed the age of eligibility for retirement from 65 to 67 years.  It is doubtful that it would attempt any further changes, especially in the short term.  Likewise for children’s benefits. The employment insurance program is financed through employee and employer premiums.  Any reductions in employment insurance benefits would be offset by reductions in the premiums, thereby having no impact on the budgetary balance.   
The government recently made changes to the Canada Health Transfer, reducing the escalator from an annual increase of 6% per year to a three-year moving average in nominal gross domestic product.  The Canada Social Transfer is capped at 3% per year.  These growth rates are currently set in legislation.  Potential changes could be forthcoming to Fiscal arrangements.  The major component of this program is Equalization.  The current Equalization legislation is set to expire at the end of this fiscal year.  Any changes to the program are expected before the end of 2013-14.  A number of technical changes are being considered but it is doubtful that there will be any major changes, despite the ongoing criticisms of the program.

This leaves direct program expenses to bear the brunt of any freeze in government spending.  This is the area of government spending that has been subject to most of the restraint measures to date.  In 2016-17, direct program expenses are projected at $119.3 billion, increasing to $121.3 billion in 2017-18.  The required cuts of $4.2 billion in 2016-17 and $13.9 billion would represent reductions of 3.5% and 11.5%, respectively.  These reductions would rise rapidly in future years. This would require the elimination of programs and the layoff of thousands of public servants.  Efficiency measures cannot be expected to generate such savings.  No programs would be safe, including national defense.

In his interview with Elizabeth Thompson, Mr. Bernier also mentioned that the spirit of the resolution was that every time a politician brought in a new program, he/she would have to cut an existing program of equal value.  However, the resolution passed at the convention goes well past that objective.  Before any new spending initiatives could be proposed, savings of $4.2 billion in 2016-17, $13.9 billion in 2017-18 and growing thereafter would have to be secured.  On top of these savings, new spending initiatives would have to be financed by reductions in existing programs.

The Bernier resolution reflects the conservative philosophy of smaller government, which has been a central theme of the Harper government since coming into power in 2006. Freezing government spending would constitute a continuation of the steady gutting of the federal government.