Fiscal model no longer sustainable – Canadian Government Executive

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May 7, 2012

Fiscal model no longer sustainable

It is difficult to determine when the debate about the need to strike a better balance between taxes and government expenditures was reignited. Certainly this was a lively topic some 30 years ago when the MacDonald Commission engaged Canadians in a serious conversation about the role of the state and the value of paying taxes in support of public services.

At the time, the MacDonald Commission recommended that Canada develop policies with greater reliance on market mechanisms and pursue a free trade agreement with the United States, the world’s only legitimate superpower. As well, the Commission recommended various reforms to the welfare state model, emphasizing the importance of social equity and economic efficiency. Many of the Commission’s recommendations were pursued by the government and the period following their implementation was generally one of prosperity, with Canada managing to keep its fiscal house in order despite periods of high inflation and large deficits.

The world has changed dramatically since that report, with the global economy putting intense pressure on governments to increase their nations’ competitiveness and technological change redefining the workplace and the value of work. Moreover, many developed countries have adopted a series of economic measures that strongly endorse Adam Smith’s basic assumption that the pursuit of private self-interest by individuals and companies will ultimately be a benefit to society as a whole.

New superpowers have also begun to emerge, putting yet more pressure on recession-prone and deficit-ridden countries to compete, leading to calls for less government spending and more favourable tax treatment for investors and entrepreneurs.

Some, however, are beginning to question whether this approach, with its singular focus on the market and GDP growth, has produced a “good” society. Certainly, there are some unhealthy signs: government bailouts of the banks to avoid the catastrophic collapse of national economies, corporate executives receiving significant compensation for mediocre financial results, high unemployment and record fiscal deficits in several countries.

Canada has remained remarkably unscathed, with a relatively healthy economy and stable labour markets. Yet, here too, there is a growing concern about whether our current system of spending and taxing is sustainable in the medium term.

Recently, Alex Himelfarb, the former Secretary to the Cabinet for three prime ministers, highlighted the need for an honest conversation about tax, one that recognizes that the impact of cuts goes well beyond the reduction of government waste. He observed, “As we cut taxes and make them less progressive, the costs of the free lunch accumulate. While the most obvious signs may be longer wait times, potholes and crumbling bridges, more insidious and worrisome is the inevitable rise in inequality.”

One way to understand what Himelfarb and others are saying is to ask our federal and provincial governments to answer the following four questions. First, what is the appropriate role and cost of government for the next 20 years? Second, should governments pay for their programs through deficit financing or increased productivity and profitability? Third, in the event that there is not enough economic growth to make up for the increases in program costs, should government increase taxes to pay for the increased levels of services being demanded by citizens. Finally, who should carry the burden of the additional taxes: high-income and wealthy individuals or middle-income earners?

The current effort by the Harper government to rein in spending, now referred to as the Deficit Reduction Action Plan, is focused on cost savings based on finding efficiencies in the current program architecture or in the use of technology. This exercise is therefore not likely to yield much information to answer these basic questions. We also know from experience that any major change in tax regimes will take a long time to implement and will need a national consensus with the provinces and citizens.

Accordingly, another approach is required for a national dialogue about the services and programs that Canadians will need and how we intend to finance them for the next 20 years. The MacDonald Commission played a very important role in orienting Canadians to the market economy and introduced us to the idea of entering into a free trade agreement with the United States. Over the past five years, the Harper government has created several advisory committees to address serious economic issues but their impact is not readily apparent. Now is the right time for a more serious national conversation about government services and taxes. The current model is not sustainable in the long term.

 

David Zussman holds the Jarislowsky Chair in Public Sector Management in the Graduate School of Public and International Affairs and in the Telfer School of Management at the University of Ottawa (dzussman@uottawa.ca).

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