The reality of fiscal restraint is descending on all governments and, despite Canada’s past prowess, complacency is a risk. Let’s not let tangential debates about whether the fiscal books should be balanced in 2014 or 2015, or whether taxes are too high or too low, distract policy-makers and the public from the core job at hand: putting Canada on a sustainable fiscal footing and doing so in a way that makes government more productive and innovative rather than simply doing less of the status quo.
The fiscal challenges facing Canada should not be underestimated, particularly in a number of provinces led by Ontario. The global recovery will be longer, slower and more volatile than expected, and these reduced growth prospects will negatively affect Canadian tax revenues and increase social safety net spending. In facing such a worsened economic reality, we are no different than any other OECD country; where we should be different is how we respond fiscally.
In much worse fiscal circumstances in 1995, government did not just cut spending, it realized it had to innovate in how to deliver government differently and more productively. This required “cuts and investments,” new thinking about how to deliver government services to Canadians, and the willingness to make difficult choices.
At Industry Canada, where spending reductions were more than 40 per cent of the departmental budget, the reduction target was actually exceeded in order to reinvest in innovative ways of serving clients: shifting from subsidies to strategic information delivered electronically; new low-cost, high-impact initiatives such as Schoolnet to connect all Canadian schools to the Internet; reinvestment in university research through new models such as the Canada Foundation for Innovation and the Canada Research Chairs; and modernizing framework policies to encourage growth rather than subsidies to finance it.
The challenge today is somewhat different than then – namely, how do we maintain our relatively strong fiscal position in a difficult global environment?
Governments have to use the necessity of fiscal restraint as an opportunity to make government more efficient, more effective and more relevant, not just lower cost. They should avoid simplistic across-the-board cuts to government operations, which typically starve capital and investments in innovation and are too often viewed as a painless source of deficit reduction.
The federal government is right to look for savings in its program spending, and to do so in targeted ways. It is also right to avoid the false debate between stimulus on the one hand and austerity on the other – in a sound fiscal framework, you can and should have both. This requires innovation in policy-making that is responsive and responsible.
Sustainable fiscal balance requires transparently eliminating or reducing programs with commensurate reductions in budgets and employment, and eliminating inefficient or outdated tax expenditures. Government should consider modernizing its “back office” by simplifying and automating administrative processes to reduce staffing levels and costs. While shifting to a smaller, more information-technology-enabled government work force, they should avoid the mistake of the 1990s and continue the recruitment of talented young Canadians to ensure a high quality and innovative public service.
While the fiscal reality will be smaller government, the objective should be more innovative, flexible public services. Why shouldn’t we have the option of “online government” in the same way we take online banking for granted? Why can’t we reduce the red tape and regulatory burden of government, particularly on small business, not by diminishing regulatory standards but by taking a taxpayer-centric approach to government rather than a departmental approach to taxpayers?
Why are we so hesitant to embrace public-private partnerships that mobilize private capital, are financed through user-pay models rather than direct tax dollars, and can set whatever level of auditable service standards the public deems appropriate? Why not consider an overhaul of our framework policies from competition policy to intellectual property to investment to trade to immigration and others as a low-cost, high-return way to improve Canada’s long-term growth prospects? Why is government not a risk-sharing partner in the market launch of innovative new goods and services by Canadian firms through its purchasing policies?
But our fiscal challenges run deeper and longer term. Governments need to address the fiscal dilemma posed by declining productivity growth and aging demographics. These produce the double fiscal wallop of lower revenue growth than we’ve experienced for decades and higher spending pressures for health, pensions and other demographically related spending.
Squaring this circle of sustainable fiscal balance comes back to increasing innovation and productivity performance to rebuild our sustainable growth and adjusting our entitlement programs to the growth economy we will have. Ultimately, fiscal balance and growth must go hand in hand.
Kevin Lynch is vice-chair of BMO Financial Group.