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Parliament Hill in Ottawa. If the Conservatives want to demonstrate that they have a small-government agenda, cutting spending is not a particularly informative signal: (Sean Kilpatrick/Sean Kilpatrick/The Canadian Press)
Parliament Hill in Ottawa. If the Conservatives want to demonstrate that they have a small-government agenda, cutting spending is not a particularly informative signal: (Sean Kilpatrick/Sean Kilpatrick/The Canadian Press)

Economy Lab

Conservatives: 'small' spenders; 'big' government Add to ...

A government that is ‘small’ is generally understood to being one that is minimally intrusive, while ‘big’ governments are highly interventionist. The projections in the last federal budget – Table 5.9 here – show a decline in federal spending as a share of GDP, and this has been cited by some commentators as being part of a Conservative agenda for a smaller government.



But it’s a mistake to conclude that a government that spends less will intervene less.



Consider, for example, BHP-Billiton’s takeover bid for Potash Corp. A ‘small’ government wouldn’t have seen fit to intervene. But the Conservative government blocked the deal -- and that decision didn’t cost the federal treasury anything. Nor would it have cost anything to block the LSE bid for TMX Group if the file had progressed that far.



Another good illustration is the climate change file. The least intrusive, most efficient way of reducing greenhouse gas emissions is to price them properly, in the form of a carbon tax. The most intrusive, least efficient way is the one the Conservatives have chosen: regulation.



The reverse is also possible: a minimally-intrusive government can still have high levels of spending. A policy regime that combines a light regulatory hand with a tax mix that is heavy on value-added taxes such as the GST/HST will still produce strong economic growth. And if those revenues are used to finance cash transfers to low-income households instead of a bureaucracy (or subsidies to companies that enjoy the favour of the government), then a government with a large budget won’t necessarily be one that is highly interventionist.



If the Conservatives want to demonstrate that they have a small-government agenda, cutting spending is not a particularly informative signal: interventionist governments don’t need big budgets.



Stephen Gordon's recent posts and Twitterfeed can be viewed here.



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