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Canadian Prime Minister Jean Chrétien at a 1994 news conference. (Peter Jones/REUTERS/Peter Jones/REUTERS)
Canadian Prime Minister Jean Chrétien at a 1994 news conference. (Peter Jones/REUTERS/Peter Jones/REUTERS)

Report on Business at 50

'Incredible shrinking government' message more important than ever Add to ...

Headlines inform but don’t necessarily reveal. Time reveals.

Based on headlines alone, most people would probably assume that Canada has a bigger federal government than it had 50 years ago. But we don’t – not, at any rate, in relative terms. In fiscal 1962-1963, a half-century ago, the federal government spent 16.8 per cent of the country’s gross domestic product, the same percentage it spent in 1920.

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Yet in fiscal 2011-2012, Ottawa will spend only 14.4 per cent. By fiscal 2015-2016, it will spend only 12.9 per cent. For the most part, the headlines missed a most remarkable story: “Government shrinking fast.”

It’s a fact. Canada has a smaller federal government than it did in the Roaring Twenties. And it will get smaller still – perhaps eventually taking the country back, in relative terms, to the liberal state of the 19th century. Can laissez-faire be far behind? The retreat is now well under way in many of the affluent industrialized countries – but Canada, beyond doubt, is a global leader.

This radical transition is not a partisan thing. It reflects a growing appreciation of the inherent limits of government. The federal government’s expansive era peaked, at 24.4 per cent of GDP, in 1984-1985: Conservative Prime Minister Brian Mulroney’s first year in office. In eight years, he reduced the size of the government only marginally.

When Liberal Jean Chrétien became prime minister in 1993, Ottawa was still spending 23.1 per cent of GDP. In its first 10 years, his government reduced that share to 16 per cent – back to the level it held during the politically frenzied days of prime ministers John Diefenbaker and Lester Pearson.

The Chrétien government cut Ottawa’s relative size by one-third, and didn’t try to hide its strategic objective of deeper cuts ahead. Make no mistake: That government knew what it was doing. In 2000, in what Dalhousie University economist Lars Osberg presciently (though disapprovingly) spoke of as the government’s “millennial vision,” Ottawa publicly announced its formula for long-term downsizing “in the 21st century.” In the future, it said, the government would limit spending growth to two benchmarks: inflation and population growth.

With firm economic management from his finance minister, Paul Martin, Mr. Chrétien finished his three terms in office with a unique accomplishment – a decade (1993-2003) in which Ottawa reduced spending, as a share of GDP, every year. (In contrast, Liberal Prime Minister Pierre Trudeau increased the size of government every year during his first eight years in office, expanding the federal state by 50 per cent, from 16 per cent of GDP to 24 per cent.)

The Chrétien government’s restraint was history’s front-page, big-headline story of the new millennium.

Here’s why: If you limit the growth of government spending to inflation and population, you stop the state from grabbing most of the country’s real-dollar economic growth – the source of almost all increases in federal spending since the Second World War (and earlier still).

With spending limited to inflation and population, the relative size of government must inevitably decline – and the private sector must inevitably expand.

Note that Conservative Prime Minister Stephen Harper and Finance Minister Jim Flaherty have now imposed a comparable limit to federal spending: a 1.6-per-cent cap (on average) for the next five years – a more stringent limit on government still.

None of this downsizing, or very little of it, has occurred in the provinces. Yet, from coast to coast, the relative size of “all government” spending (federal, provincial, municipal) is falling – from 50 per cent of GDP in 2001 to 35 per cent in 2011. Based on current federal-provincial spending projections, this tally can be expected to fall in the near term to 30 per cent or less. A downsizing of this magnitude would take “all government” back almost 50 years, too. In 1960, federal-provincial spending took 28 per cent of GDP; in 1937, it took 25 per cent.

So far, Liberals and Conservatives alike have successfully managed the transition to limited government – thanks to an important change in public opinion. The percentage of people who want bigger government is relatively small, and getting smaller. Governments have found that they can occasionally say no, and still survive.

In Public Spending in the 20th Century, published in 2000, noted economists Vito Tanzi (International Monetary Fund) and Ludger Schuknecht (European Central Bank) explained why. Much of the increases in public spending since the 1960s, they showed, produced little advance in public welfare, yet resulted in high levels of government debt. Further, the authors argued, much government spending could be reversed with minimal harm.

The authors advocated a return to the classic liberalism of the 19th century – the liberalism that disciplined public expenditure in Canada from Confederation through the Second World War. “What?” exclaimed a stupefied Prime Minister Louis St. Laurent to one of his ministers in the 1950s. “You want the federal government to fund ballet lessons?” Uncle Louis preferred to use budget surpluses to pay off old debt from the First World War, which he did.

Yet this Liberal leader’s intuitive fidelity to limited government was already under siege. In 1957, in his final year in office, he set up the Canada Council, which has provided federal financing for the arts ever since. But note: He did so with typical economy, establishing the council with only the death taxes from two wealthy Canadians: industrialist Sir James Dunn and financier Izaak Walton Killam, at Mr. Killam’s request.

Government spending, of course, is only one manifestation of the welfare state. Government regulations – the nanny state, the big brother state – are another thing altogether. Yes, low interest rates have made it easier to limit the growth of government. But interest rates will rise again. That’s why it’s important now, to first balance budgets and to then pay down debt. Without intending in any way to disparage ballet, it is now clear – stop the presses! – that Uncle Louis knew best.

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