Federal Budget — There's Still Room For Spending Cuts

One of the commenters has shared a link to an interesting article on the Progressive Economics Forum. According to them, the Federal government doesn't really have much room for spending cuts: most of their expenses are transfers to other levels of government and, of what's left - the lion share goes to the areas such as National Defense and Public Safety, Revenue Canada and the Treasury Board, leaving mere $24.5B for other departments. So, they conclude, even if the government eliminates those departments completely - it won't be enough to balance the books in 2011/12, let alone - in the coming fiscal year.

Here's how they do the math: There are transfers to other levels of government that the Feds promised not to reduce. There are benefits (child, old age, EI) that the government wouldn't want to claw back. There are operating expenses of the Crown corporations - those are needed to deliver the mail, insure mortgages and so forth. And there are operating expenses, of which the lion share goes to the departments that the government regards as top priority. That leaves mere $24.5B or less than 12% of the total program spending, where the cuts are even theoretically possible. So, they conclude, even if the government succeeds in slashing a billion or two - it will seriously hurt the public service, but won't make much of a difference when it comes to over $45B deficit, projected for this year.

Well, nobody argues about the coming fiscal year. 2010/11 - that's still the "stimulus" year, when the government still tries to prevent the crisis from returning and to accelerate economic growth with stimulus spending. Although, some fiscal discipline certainly won't hurt. Let's look at 2011/12 - the first "post-stimulus" year, when the nation should start returning to business as usual. The deficit projection for that year has grown from the originally projected $14B to $27B. Could it be that there's absolutely no way to reduce that number without defunding the entire departments, without clawing back pensions, benefits and transfers to provinces or without raising taxes?

The author bases his calculations on the 2008/09 numbers. In that year, operating expenses of Federal departments (not including the Crown corporations) amounted to $61.5B. Operating expenses for 2011/12 are estimated at... $72B. That's a 17% increase over 3 years - despite the record low inflation. By 2014/15 operating expenses are projected to hit $80B. Again, that doesn't include the Crown corporations. Their operating expenses are capped at $7.6B for the next 5 years. Isn't there a way to keep the Federal government operating expenses capped for the same period of time?

Of course there is. Yes I'm talking about zero-based budgeting. (And I'll have to keep talking about it until we actually see it being phased in.) If each department is compelled to justify every single expense they incur - it won't be the Finance Minister's job to justify his decision not to add 3 or 4 extra billions on top of the last year's operating expenses. It will be up to the departments to explain why those expenses are even there. That will allow to eliminate wasteful spending such as:

• Expenses that were originally designated as temporary or as emergency measures - that should have lapsed years ago.
• "Year-end" expenses - when the department tries to spend as much as possible before the end of the fiscal year to demonstrate the "need" for more funding.
• Ideologically-driven spending - I'm talking about grants to NGOs and similar organizations that are more lobby groups than charities.

If the government succeeds in slashing operating expenses from the projected $72B back to the pre-recession level ($62 or so) - that will save ~$10B in 2011/12 alone.Most likely it won't be enough to fully eliminate the deficit. But borrowing $10B less in 2011/12 will result in slightly lower interest payments, saving about $0.7B annually.

The $32.8B in transfers as part of direct program expenses too should be subjected to the same scrutiny. Unlike the $56B in major transfers to provinces, (which the government pledged not to reduce,) those are targeted grants. Zero-based budgeting will make it possible to draw a clear line between supporting important infrastructure projects and bankrolling plenty of yell-the-loudest special interest groups and NGOs under the guise of promoting tourism or celebrating multiculturalism. Sure, those are small potatoes, but - a million here and a million there can add up to a billion or two a year. Not something that a responsible government would neglect when program expenses outnumber the revenues.

And, theoretically, those measures alone would be enough, to balance the books in 2012/13 at the latest. Sure, the government could resort to even more extreme measures, if needed. (Such as - capping transfers to provinces at 2010/11 level or suspending some foreign aid projects that don't directly deal with disaster relief operations.) That could slash a few more billions off the inflated program expenses, nearly eliminating the deficit, projected for 2011/12. But even without those extreme measures, we definitely don't have to wait until 2015/16 for the Federal budget to be balanced. As we see, it could be done much, much earlier.