Don’t spend federal budget surplus right away: Hartt in the Vancouver Sun

Writing in the Vancouver Sun, public policy expert Stanley Hartt says Ottawa shouldn’t use a planned federal budget surplus as an excuse to go on a spending spree.

Instead, he writes, the government should scan the horizon for issues that will squeeze finances in the future. Health care, retirement savings and paying down the federal debt will all require increased resources in the years to come.

“That is why we should opt for a careful examination of important issues facing the country, not a quick ‘let’s spend the inheritance’ party”, Hartt writes.

The column is based on an article Hartt wrote for the most recent edition of Inside Policy, the magazine of the Macdonald-Laurier Institute.

By Stanley Hartt, Oct. 3, 2014

With Stephen Harper’s revelation on Thursday that the federal deficit has shrunk by more than $10 billion, it seems certain that the 2015 budget will boast the first surplus since 2007. It is natural to react like lottery winners, rubbing our hands in glee as we contemplate what to do with these unaccustomed, welcome riches.

But if we learned nothing else from being driven fiscally offside by exogenous events not of our doing, some prudent contemplation would be in order. The initial prize will be small enough and the range of options limited.

If “good policy is good politics,” voters will expect that government deal with priorities known to need a solid rethink and substantial additional funds over the next decade. But they must also understand the limits of the surplus windfall.

The current retirement savings regime, supplemented by personal, non-tax-assisted, savings, is forecast to result in a level of income in retirement that cannot sustain prior lifestyles. Instead of balkanizing our retirement savings framework with separate provincial retirement plans, as Ontario has proposed, it would be wise to undertake an in-depth study evaluating potential solutions to enhance utilization of existing tax-assisted savings plans like the RRSP or TFSA, improving financial literacy so earners and savers could better understand how much they needed to contribute in order to have enough for a respectable retirement. Examining the different regimes used by OECD countries would spur some creative critical thinking.

Health care costs continue to escalate as a proportion of provincial budgets. Wait-times for elective procedures are used as rationing tools. Technological and pharmaceutical advances bloat the expenditure profile over time. Why not consider addressing this long-term challenge with some thoughtful revamping, which may involve recognition of what our system can and cannot deliver? Ideas such as the use of lower-overhead settings for the delivery of care (after all, every doctor’s office is a private clinic) and removing organizational obstacles to the use of existing facilities as well as a federally-led clarification of what the Canada Health Act does and does not preclude could be part of a groundbreaking rethink of our sclerotic system which could actually save money instead of costing money.

The perennial list of spending ideas from government departments, many of them good, always vastly exceeds available resources. None of these generally has the capacity for massive benefit which the two issues just mentioned hold for Canadians.

A reduction in marginal tax rates is a better way of delivering tax relief than tax expenditures designed to encourage a particular kind of activity. The cost of the long-anticipated “income splitting” for couples with children under the age of 18 will likely be high in relation to the size of the surplus expected in the next budget. The government’s proposal would allow one partner to shift the tax burden of up to $50,000 per year in taxable income to the other.

Keeping faith with promises to taxpayers is important, so the government will likely allocate a good chunk of the predicted surplus to honouring this promise. Perhaps modalities could be identified to make it marginally less costly while largely delivering the anticipated targeted relief.

The tax system needs a purging of the bells and whistles that have built up in it since the major tax reform initiative launched in 1988. The government correctly boasts that low marginal rates have benefited investment in Canada. Re-examination of our regime would be a timely thing to put in the window, displaying a vision for the future.

At a time when interest rates are historically low, the impact of service charges on the national debt crowding out program spending is not quite as perceptible as when interest rates are considerably higher, but debt service charges invariably infringe on a government’s ability to fund new initiatives. The benefits of parsimony are not just knowing that the debt load is shrinking. The restoration of the ability to make choices is equally important.

New programs have “tails”, i.e. the continuing cost of maintaining the program through its legislated life. Expenditures must be appropriately profiled over many years to understand how they infringe on the budgetary space available for other, equally-desirable programs.

We should use “other people’s money” in the form of Public Private Partnerships to assist in the renewal of much-needed infrastructure. The borrowing cost of private entities is higher than the cost of capital of various levels of government, but the benefit of having the infrastructure project up and running years sooner can easily compensate for this.

Privatization of Crown corporations and assets should be considered where significant proceeds can be realized on the sale of assets the government does not need to own to provide public services. The various airport authorities could be converted to commercial concessions with a huge one-time gain to government without cannibalizing the public revenue stream currently derived from this source.

Governments are not elected for what they have done but rather for what they propose to do in the future. One need look no further than the revered Sir Winston Churchill, who, having won the Second World War. was turfed unceremoniously from office in favour of Clement Attlee. Governments seeking re-election must offer a vision of the society they propose to build which corresponds to the aspirations of the people. That is why we should opt for a careful examination of important issues facing the country, not a quick “let’s spend the inheritance” party.

Stanley H. Hartt is a lawyer, lecturer, businessman and former civil servant. This piece is adapted from an article in the October edition of Inside Policy, the magazine of the Macdonald-Laurier Institute (mli.dev.pcomms.ca).