COVER/SPECIAL REPORT

A REPORT CARD ON THE BRIARS DEFICIT ACCORD

An economist reviews the merits and flaws of the accord’s plan to reduce the federal debt burden

LEIGH ANDERSON September 27 1993
COVER/SPECIAL REPORT

A REPORT CARD ON THE BRIARS DEFICIT ACCORD

An economist reviews the merits and flaws of the accord’s plan to reduce the federal debt burden

LEIGH ANDERSON September 27 1993

A REPORT CARD ON THE BRIARS DEFICIT ACCORD

An economist reviews the merits and flaws of the accord’s plan to reduce the federal debt burden

LEIGH ANDERSON

In his 1936 budget speech, federal Liberal Finance Minister Charles A. Dunning vowed “to end in the shortest practicable time the era of recurring deficits.” He argued that such a policy would “contribute more effectively to the solution of the problems of unemployment and depression than any other single thing.” Judging from the deep budget cuts urged by The Briars participants, Dunning’s ghost might have been haunting their deliberations.

Would their plan, if enacted, eliminate the federal deficit by 1996? Not likely. But regardless of the potential impact of the group’s proposals, they reflect the urgency, fear and frustration with unfulfilled promises of many Canadians. The participants’ target of eliminating the deficit in three years, however, is itself extremely ambitious, especially considering that several of their recommendations for improving government processes and creating wealth require outlays that would negate some of their spending cuts.

On the revenue side, the group decided against raising personal and corporate income tax rates, opting instead to try increasing the tax base by stimulating growth. The participants were also adamant about holding the Goods and Services Tax (GST) at seven per cent. If consumer confidence and spending increase, GST revenues could rise. Also, harmonizing the GST with provincial sales taxes, which could make it less costly to administer, might allow Ottawa to lower the rate slightly. That might encourage some illegal economic activity to come above ground.

Overall, under a best-case scenario as-

Leigh Anderson is an assistant professor at Carleton University’s School of Public Administration in Ottawa. suming 4.5-per-cent economic growth, tax revenues could increase by as much as 25 per cent over the next three years under the group’s plan. But if the economy stalls, and high unemployment persists, tax revenues would not keep up with expenditures and interest charges on the debt, and the deficit could swell.

On the expenditure side, The Briars Accord recommends that most federal programs be cut by 30 per cent over three years. But equity is not necessarily the most efficient strategy. Some sectors and regions can absorb cuts better than others. Cuts made today to poorer provinces may simply emerge later as increased equalization payments. As well, distinctions must be made clearly between cutting investment, which creates future costs, versus cutting day-to-day expenses and income-support programs.

More than one-fifth of Ottawa’s expenditures are transfer payments to other levels of government. The Briars Accord calls for 30-percent cuts to two of the largest such programs: Established Program Financing and the Canada Assistance Plan. But unless the provinces also cut spending by 30 per cent, this merely transfers some of Ottawa’s deficit to them. And unlike many U.S. states, where drafting deficit budgets is illegal, no legislation exists in Canada to force provinces to be fiscally responsible. The proposed cuts to postsecondary education also conflict with the group’s own proposals to enhance educational opportunities.

The participants proposed reforms to reduce patient abuse of the health-care system and to introduce user fees of $5 to $15 for emergency services. Although those proposals would generate some revenues and some savings through reduced use, the burden would fall disproportionately on lowincome people. The user-fee debate also diverts attention from a large source of waste in the system—mismanagement. Either way, the group is unlikely to achieve its target of $3 billion in savings. Cuts of that size would mean rationing services.

The suggested cuts in welfare and social assistance are particularly harsh measures with an 11.3-per-cent unemployment rate. During a recession, those payments increase precisely because of high unemployment. Reforms could reduce dependency in the long term, but over the first three years they could also put more people on the street.

Almost everyone has an example of waste in the public sector, making government operations a tempting target for cuts. But since 1984, Ottawa has reduced its real operating costs by 14 per cent. Is there enough fat left to cut an additional 10 per cent a year, given that salaries have already been frozen and departments streamlined? Perhaps. But Canadians will have to accept lower levels of service.

Few programs aroused the ire of The Briars group like unemployment insurance (UI). But in principle, the program is selffunded from employer and employee contributions. Ottawa absorbs the plan’s deficit when times are bad, but receives a surplus when unemployment is low. So although UI reforms do not directly cut government spending, they could push people back to work—where work exists.

The group also cut payments to senior citizens by taxing back Old Age Security benefits from wealthy recipients. Seniors are a powerful voting bloc, however, and messing with the OAS plan amounts to changing the rules that they worked under for decades.

Totalling up the numbers, is it likely that the group’s annual expenditure cuts of almost $10 billion will cut the deficit by $30 billion in three years? Not a chance. The best-case scenario is that $2.5 billion just reappears in provincial deficits and another $2 billion comes back to haunt Ottawa in increased transfer and income-support payments. Even with the group’s hard line on benefits, some tax revenue will be lost due to increased unemployment, bringing the net annual deficit reduction down to $5.5 billion. The worst-case scenario is that the drastic cuts shatter the fragile economic recovery and actually increase the deficit.

By the way, three years after his hardline 1936 budget speech, Charles Dunning reversed his position and introduced Canada’s first budget based on the theories of economist John Maynard Keynes. He increased public-works spending in the hope of kickstarting the economy. The Briars Accord echoes Dunning’s sentiments of 1936. Who knows if the 12 Canadians will reverse their position in three years. They were mostly concerned with sending a signal. And I think their message is clear.