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analysis

In the academic world, submitting an old essay for a course assignment would get you a failing grade, if you were lucky.

But in the world of politics, using past deeds to claim you’ve made good on current promises is just another way to avoid tough choices, as Finance Minister Chrystia Freeland demonstrated in her fiscal and economic update last week.

Back in April, Ms. Freeland launched dual spending reviews. The first, the purview of the Finance Department, was to carve out $3-billion in one-time savings, with details to come in the fall budget update. A second review, helmed by the Treasury Board, is to conduct a broader examination of government spending, with a more ambitious goal of finding one-time savings of $6-billion over five years, starting in fiscal 2025, and continuing savings of $3-billion by fiscal 2027.

As promised, the Finance Minister provided details on the more immediate spending review, claiming that the government had not only met, but had exceeded its goal, with $3.8-billion in savings from lower-than-expected spending on COVID-19 relief programs for businesses and individuals.

Speaking to reporters last week, Ms. Freeland said the review was intended to focus on COVID-19 related expenses.

Superficially, that looks like proof of Ms. Freeland’s newly minted bona fides as a fiscal hawk. However, the Finance Minister’s assertion to have fulfilled her pledge to squeeze $3-billion out of federal spending does not hold up under scrutiny.

To start with, there is the issue of timing. The budget, delivered in early April, promised that the review would reduce spending “that has yet to occur by up to $3-billion over the next four years.”

But the savings listed in the fiscal update occurred in the previous fiscal year, ending March 31. So, yes, COVID expenses were lower – but that had already happened before the government made its cost-cutting promise. (Given the pace of federal accounting, the government may not have known about those savings until weeks or months later.)

Then there is the question of Ms. Freeland’s assertion last week that the intention was to focus on COVID-19 relief programs. As a start, no such statement was made in the April budget.

More to the point, the claim makes no sense. According to the April budget, the spending review would be “a process to re-examine previously announced spending plans to ensure government programs are fit to changing circumstances, including a stronger-than-anticipated economic recovery.”

That is a clear statement of an intention to streamline continuing programs – a description that does not apply to COVID-19 relief programs that, for the most part, have wound up. In any case, the Liberals attributed their $3.8-billion in savings to lower-than-expected uptake by businesses and individuals, not to any action on the government’s part.

Moving beyond semantics, the Liberals have clearly ignored the spirit of a cost-cutting exercise, namely to squeeze some efficiencies from current spending. That necessitates scrutiny of the bureaucracy, and some action on the part of the government – not simply taking credit for the fact that Canadian businesses and individuals were paid fewer benefits.

The phantom spending review might be less of a concern if government spending were flat compared with the April budget. In fact, the Liberals boosted spending by billions of dollars, including an additional $575-million in the current fiscal year to improve the delivery of services to Canadians.

To recap: the spending review unearthed no savings that had not already occurred before the review was announced. Instead, the Liberals spent an extra half-billion dollars on things that the public service should have already been doing.

None of this bodes well for the longer-term spending review from Treasury. That strategic review could be an opportunity to rethink how government works, and to redirect tax dollars from the bureaucracy to citizens in some combination of enhanced services, lower taxes or lower debt.

Or, the Liberals can continue to come up with semantic dodges that duck the hard work that a real spending review would entail.

Taxing questions

Responding to last week’s newsletter item on federal child-care subsidies, one online reader asserted that subsidized daycare more than pays for itself, with more tax revenue generated from more working parents (as measured by a higher labour-force participation rate).

There is some basis for that assertion, but it’s definitely not true in the short term, and may not turn out to be correct in the long run, either. There have been studies of Quebec’s experience with subsidized daycare that found that the resulting gains in tax revenue did outweigh expenses.

But there are several important caveats. The most important is that Quebec’s labour-force participation rate was relatively low when the province’s subsidized child-care system was first set up in the 1990s. That meant that it was relatively easy to increase the labour-force participation rate.

For most parts of the rest of Canada, that is not true. Participation rates, although lower for women of child-bearing age, are still significantly higher than those of Quebec 25 years ago.

Then there is the question of how much child-care capacity will expand. The federal Liberals’ child-care subsidy program has two aims: to reduce the out-of-pocket costs for parents, and to expand the number of subsidized spots. It’s the second part of that strategy that will help to increase labour-force participation, as last week’s newsletter noted. Reducing the fees paid by parents certainly benefits individual families. But it will have a negligible effect on expanding the work force.

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Money metrics: What’s the best way to measure the change in government spending? University of British Columbia economics professor Kevin Milligan, in a recent Twitter thread, lays out a compelling argument for why spending as a proportion of gross domestic product is the metric that most closely hews to the real world. In short: using constant per capita dollars is a flawed approach, since that implicitly assumes that no part of any increase in national wealth should go to public services. Much better, Prof. Milligan argues, to use spending as a percentage of GDP – reflecting the reality that demand for public services increases with national wealth.

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.