A splurge without precedent

On March 23, 2004, Ralph Goodale rose in the House of Commons to deliver his maiden budget speech. The stakes were high: the country was still reeling from the revelations in the sponsorship scandal, and an election was imminent. Mr. Goodale knew what he had to do. He told the House he was presenting “a focused budget plan” designed “to demonstrate unequivocally the principles of financial responsibility and integrity.” While some had suggested the Liberals would “throw fiscal caution to the wind” or “engage in a pre-election spending spree,” the new Finance minister stoutly promised he would not. “What we will do,” he thundered, “is balance the books and better control spending, because Canadians have come too far and sacrificed too much to slide back into the glue of red ink and deficits.” The message was clear. Financial responsibility. Integrity. Better control of spending. Observers commented on the modesty of the budget’s ambitions, especially in an election year. And indeed this became the theme of the subsequent campaign. Where the Conservatives promised major tax cuts, the Liberals emphasized a message of fiscal prudence. It seemed to catch the public mood, and probably saved their government. Eleven months later, we can see what a sham it all was. The budget that Parliament passed, the budget on which the Liberals were elected, bears no resemblance to the actual fiscal record of the past year. The budget called for

program spending of $148-billion. As of this week’s budget, program spending for 2004-05 now stands at $158-billion: a $10-billion overrun, and an increase of $17-billion over the previous year. But stay tuned -- by the time the final numbers enter the public accounts, they could be higher yet. The Liberals didn’t engage in a pre-election spending spree. They engaged in a post-election spending spree. At 12%, or 8.5% after inflation and population growth are taken into account, this will go on record as the largest single spending increase in over 20 years. It is, indeed, the fourth-largest in the last four decades, exceeded only by 1983, 1975, and 1972. But 1983 and 1975 were both recession years, and in 1972 Canada was still laying the foundations of the modern welfare state. This time around, they did it for no other reason than, well, because they could. But the real story is not how fast spending has grown in the last year. It’s how fast it’s been growing for the last five. Since fiscal 2000, program spending has climbed by 44%, or nearly 23% in real per capita terms: the largest five-year spending increase since the early 1970s. And, according to the budget papers, the next five years promise more of the same. By fiscal 2010, program spending is projected to rise to $195-billion. There is just no precedent for what the Liberals are doing. Again, this is absent recession, or war, or a crisis of any kind, and without the impetus of any major national objective like building the railway or establishing medicare. It is purely discretionary. The year 2000, I suspect, will prove one of those watershed years, when the path of government spending takes a historic turn in one direction or another. The best way to see these is to compare actual spending to spending as it would have been if held constant in real per capita terms: that is, if it increased each year, but only by enough to keep pace with increases in prices and population. The chart shows the results -- the roads not taken in fiscal terms.

In 1965, total federal spending on all programs combined came to just $7.5-billion. If it spent the same amount on each citizen today, after inflation, the budget would be $78-billion, half the actual figure. But that was before medicare, and the Canada Assistance Plan, and the other shared-cost programs, after which spending began to ramp up very quickly. This continued until 1975, when the first attempts at restraint were made -- before the recession of the early 1980s blew the budget completely off the rails. By 1985, spending had ballooned to what remains its all-time record high, as had the deficit. The incoming Tories began their long quest to tame the spending dragon. But you can see they didn’t get very far: spending grew only slightly less rapidly than the inflation-plus-population growth track. It wasn’t until 1995, and a Finance minister named Paul Martin, that the beast was decisively broken. Spending dipped below even 1975 levels, and stayed there -- until 2000. Spending has since rocketed upward, drawing level again with its 1995 track. By 2010, it seems destined to exceed even 1985 levels -- until now the gold standard of Liberal profligacy. Now look at the last line on the chart: the 2000 track. Had spending merely been held to inflation-plus-population growth since then, or about 3% annually -- which was the promise made at the time -- instead of the 6% and 8% and 12% to which we have grown accustomed, the federal government would cost fully $30-billion less than it does today. Behold the power of compound interest. But that perhaps puts rather too antiseptic a gloss on it. The real cost of that $30-billion is the other purposes to which it might have been put -- namely, cutting taxes. Total federal personal income tax revenues this year will come to $90-billion. So we are talking about a one third cut in taxes that could have been made, and wasn’t. And the worst of it is: we were never told any of this in advance. Every year’s budget projected mild growth in spending two years out, and every year’s budget revised the previous year’s estimate upwards, usually to the tune of billions of dollars. The 2004 budget was only the last, and most flagrant, in a series.