February 28, 2003
Northern Tiger Recipes
More is never enough. Despite the biggest single-year federal budget increase in twenty years – more than 11 percent – reaction was decidedly mixed.
Although the recent budget contained something for almost every interest group under the Canadian sun, more than a few criticized it for miserliness. A Globe and Mail’s online opinion poll showed 69% agreeing that the budget was an “old-fashioned Liberal spendfest.” Callers on impromptu polls on CJOB overwhelmingly complained about the lack of tax cuts. For the broad Canadian middle class, distinctly handicapped in a system that panders to small but highly organized lobbies, it was a bust.
The public’s thinking may be way ahead of the government’s. Scattering a vast mish-mash of cash into more government spending is a strategy tried before and found wanting. Charitably, this final budget splash was part of the Prime Minister’s long goodbye.
One indication that it may be aberration was Finance Minister Manley’s first major post-budget speech. In Toronto, he set out a bold proposition that the top priority should be to get Canada’s high tax rates to levels below the United States. Capital taxes, which destroy jobs and investment, were on their way out. Next he wanted to raise the low threshold for Canada’s top income tax rate, which kicks in just below $69,000, compared to over $470,000 in the United States.
If such talk is serious, Canadian politicians need to grasp that they are competing with a rapidly moving target. The Bush government is talking about dramatic tax cuts skewed to most productive parts of the economy, with reductions in top rates and an end to the double taxation of dividends. Both will aggressively ramp up economic growth and accelerate Canada’s lag on the productivity and living standard fronts.
Though premature, talk of the “Northern Tiger” economy is a welcome change from our recent image as a fiscal basket case. The swelling federal treasury demonstrates the wisdom of restrained spending, consistent surpluses and a pay down of the massive federal debt. In 1996, interest payments gobbled up 37% of all federal revenue and accounted for 6% of the Canadian economy. A few years of moderation later, we find interest payments down to 21% of revenues and 3.3 % of GDP.
The PM’s goodbye blow-out delays the arrival of genuine “tiger economy” status. Faster debt reduction and lower taxes – or some combination of both while holding spending increases at or below the economy’s growth rate – would rapidly reduce interest payments that still account for over a fifth of federal spending. It would permanently free up room for more public spending on vital services.
At this point, lessons from the Netherlands and the “Celtic Tiger” economy of Ireland are worth reviewing. In the mid-1980s, both countries had among the worst performing economies in Europe. In a situation familiar to Manitobans, slow growth, high taxes and big government had produced stagnation. In Holland, a left-of-centre coalition with labour federation support set out to reduce central government expenditure by 6% between 1994 and 1998. It also committed to distributing the dividends from faster economic growth by cutting income taxes. It worked spectacularly, producing bigger slices of state revenue from a faster-growing pie, and one of the continent’s most dynamic economies.
Ireland’s Celtic Tiger was also born out of government spending cuts. Between 1987 and 1989, a labour coalition government slashed government spending from 50% to 40% of GDP. That created what economists call an "expansionary fiscal contraction", when a reduction in government activity stimulates, rather than retards growth. The tough medicine was complemented by a 10% corporate tax rate and an excellent education system. They never looked back. A relatively small economy started growing at 7 to 8% a year. In 1985, Irish per capita income averaged only 40% of ours. Today, thanks to supercharged growth, Irish per capita income now surpasses Canada’s by almost 25%.
In both cases, revenue dividends from the virtuous circle of faster growth provided room for higher spending and lower taxes. The result still escapes our own old style policy thinkers: a bigger pie provides the base for better public services and higher living standards. Ireland’s public sector consumes 29% of its economy today versus 51% in 1985. Lower taxes generated far more resources for public spending.
The lesson for the federal Liberals and, closer to home, our own Doer Government, is to forget yesterday’s obsession with alternately redistributing and subsidizing a slowly growing economic pie. An intelligent pruning and restructuring of public spending to hold increases slightly below the economic growth rate, with the growth dividend applied to lower taxes, mean more government revenues in the medium and long term. To maximize growth, we need to reduce public spending in Canada from 41% to 30% of the economy, a level similar to that in the much admired Celtic model (and, not coincidentally, the U.S.)
Hopefully, Mr. Manley’s old-fashioned budget is just a temporary sop to a departing leader. He seems to know what will make the Northern Tiger roar, as does the Prime Minister in waiting. As wiser Dutch and Irish left-wingers and union leaders learned many years ago, less means more when we get back to the fundamentals for growth.
The Frontier Centre for Public Policy
is an independent public policy think tank whose mission is "to broaden the debate on our future through public policy research and education and to explore positive changes within our public institutions that support economic growth and opportunity."