Less Government, Better Economy

The recipe for improving the Canadian economy lies in cutting government spending and reducing taxes.

A review of the ten submissions for The Mark’s recent series on ways to fix the Canadian economy reveals a disturbing trend: virtually all call for more government spending and more government intervention in our lives.

The exception, and lone sensible option put forward, comes from Frank Graves of EKOS Research and his idea to eliminate interprovincial trade barriers. But with a panel heavily weighted with current members of the federal Liberal Party and others with an interventionist bent, the call for more government spending shouldn’t be a surprise. But the fact remains, they are wrong.

The first steps towards improving the Canadian economy are simple, basic, and haven’t changed in years: cut government spending and reduce taxes. These two measures would unleash the entrepreneurial spirit of Canadians and encourage investment and job creation.

With the exception of the 1990s government led by former Prime Minister Jean Chrétien and then Finance Minister Paul Martin which introduced austerity reforms that balanced the federal budget in three years, Canada has seen a succession of governments more interested in spending and kowtowing to special interest groups than in building the basis of a sound economy.

So where do we start? Let’s begin by cancelling what’s left of the federal government’s stimulus program, or as it’s advertised, Canada’s Economic Action Plan. The federal government’s stimulus initiatives have already been shown to have done little to bring about the end of the recent recession. And with 40 per cent of the total federal stimulus package devoted to infrastructure projects, most of this money will not be spent until well into this year. The risk now lies in the possibility that the government will end up competing with the private sector for scarce resources resulting in increased costs and fewer private sector projects than would otherwise be the case.

With the stimulus spending out of the way, the federal government then needs to focus on an aggressive plan to eliminate deficits. A prudent and realistic plan would have eliminated the deficit by 2011/12. Doing so would simply require the government to eliminate stimulus spending for 2010/2011 and 2011/12 and reduce program spending by an additional 2.8 per cent each year. Once the government gets its fiscal house back in order, the fiscal room can be created to refocus on improving Canada’s ability to attract investment and create jobs. And that should be done through reductions in taxes, not increasing government spending.

A recent analysis by Harvard economists Alberto Alesina and Silvia Ardagna of stimulus initiatives in Canada and 20 other industrialized countries from 1970 to 2007 found that successful stimulus initiatives – those that increase economic growth – focus on tax cuts while unsuccessful ones rely on government spending.

Tax-relief will improve the incentives for Canadians to work, save, invest and be entrepreneurial, thereby improving Canada’s competitiveness.

Of particular concern are Canada’s high marginal personal income tax rates on middle and upper income Canadians that apply at relatively low levels of income. For instance, Canada maintains among the highest marginal personal income tax rates on middle and upper income earners among the G7 countries.

Years of economic evidence and academic studies point to one, constant truth: you can’t grow a nation’s economy by constantly increasing government spending.

In order to improve Canada’s economy, we need a government willing to reduce spending, balance the budget, and reduce taxes and regulations. This would provide the necessary incentives for individuals and businesses to engage in productive activities and ensure a bright future for all Canadians.