Sunday, 26 February 2012

Federal Spending Power and the Drummond Report

There are several ways to read the Drummond Report  - the Commission on the Reform of Ontario's Public Services -as is no doubt the case with any report. Most obviously, there is a provincial lens and, even then, there are markedly different interpretations. Undoubtedly, Ontario's fiscal house is no longer in good order. A combination of recessionary deflation coupled with increased commitments in public expenses have created a nearly untenable position of declining reviews and growing commitments to social programs. Beyond there immediate variable of global economic turbulence there are a host of structural problems which plague Ontario's economy. Drummond's report, however, exist partially in a vacuum and treats government spending as a free floating phenomenon. It's typical of economists, isolating what interest them and cutting out the external world. Sadly, the approach does not translate well to public policy and the report has been met with a predictable chorus of agreement and rejection.

The right has seized on the need to drastically scale back government expenditures and, by extension, the intrusiveness of the state. On the left, the rhetoric has focused on a rhetoric of making life affordable. There is validity in both sides, although it is deployed to different ends. The right - as is often the case during recessionary periods - uses these exceptional conditions as proof positive that the size of the state is too large and must be pared back. Large levels of public debt, they argue, will further undermine the economy. Never mind that those making these claims have been wrong on the need to cut corporate tax rates to stimulate the economy - businesses have been sitting on large reserves of capital or passing savings along as dividends, not investing job creation - or that massive cuts will result in higher unemployment rates. The left flank in Ontario - now wallowing in shallow populism - merely seeks to socialize the costs incurred by 'families' and impose them on the tax base as a whole in a budgetary shell game. Costs are borne indirectly and so prove an illusory benefit.

While presented an a nonpolitical and neutral undertaken, Drummond's report is pregnant with ideological underpinnings more inline with the political right. It is inherently Neoliberal in its outlook advising for severe retrenchment of government services and expenditures. As Armine Yalnizyan points out, however, Drummond relies on excessively bleak prognostications which assumes essentially the present as the base line for future spending. It uses as its base metric recessionary statistics in order to set future government expenditures. In this way, the report artificially limits the actual capacity of future governments to support social programs which are vital to the health of Ontarians. The report, as such, provides little more than a right-wing justification for gutting public expenditures but couched in the language of neutral fact and statistics. 

Of course, Drummond cannot take into account purely political considerations. Much of the target areas include signature planks of McGuinty's legacy: health and  education. Even Tim Hudak has his sacred cows, er, horses. There is a lack of political will to tackle areas in which it is clear that the government is merely subsidizing one segment of a population with debt financing, funding which provides little benefit. The 30% tuition rebate literally takes money from some students - often grad students - and passing it along to others on the bases of an arbitrary cut off. This neither improves the quality of education nor makes it more accessible. The Clean Energy rebate subsidizes energy use and discourages conservation, costing public coffers a billion dollars annually. A combination of colloquial interests, a lack of common sense and public backlash make implementing many of the recommendations difficult. In fairness to Drummond - who's findings regardless are often suspect - he was hampered by the limitations place on him by politicians. Indeed, the scope of the report is limited as the purview excluded examination of new revenues. 

There are clear areas in which decreases in services could be offset by actual efficiencies - not in the Rob Ford sense - or through the generation of new revenues. Already the McGuinty government has decided to postpone a final cut to the corporate tax rate. The raising of new revenues, however, is largely a non-starter given the populist anti-tax rhetoric that has been seized upon by the major parties. The result is that increases in taxation, even to save important social programs, are no longer viable options as tax increases can be used as effective political fodder in electoral campaigns. Indeed, tax has somehow becomes a four letter word. The result is a situation in which revenue cannot be raised due to conscious public policy decisions.

This is not a purely provincial story. The overlooked factors are a change in the nature of both provincial-federal diplomacy and the ideological outlook of the federal government in general. Beyond the fiscal pressures of individual provinces these play a central yet often ignored component. Moreover, this goes beyond simple complaints about a fiscal imbalance or the alleged unfairness of federal transfers. It cuts to the core of Canadian federalism and a major disjuncture with our constitutional origins.

John A. MacDonald's preferred vision for Canada was for a strong federal state similar to that of Great Britain. Instead, a compromised vision was achieved, yet one that more closely resembled the MacDonaldian vision than subsequent developments. At Confederation, provinces were relegated to a secondary status with few important functions or duties. Indeed, the central government maintained a monopoly on the more 'important' or prestigious portfolios such as defence, trade and, importantly, greater powers of taxation and revenue generation. The provinces, on the other hand, had fewer powers of taxation yet they also had fewer outlays in the form of large public expenditures. Spending on education was comparatively minuscule and responsibility for what would become health care - the provision of hospitals - was equally non-existent. Health and education were realms of public policy which received little interest. Large infrastructure projects - and thus public expenses - rested with the federal government in the form of railroads and the military.

The twentieth century would bring changes in the nature of federalism and the relationship between the Dominion and the provinces. Some changes came from changes in economic fortunes. The Great Depression - exacerbation by the Dust Bowl in the Prairie provinces - negatively affected provincial ability to finance existing programs. The 1940 Rowell–Sirois Commission results in the transfer of the responsibility for pensions and and unemployment provisions to the federal government based upon the notion that the size and revenue generating powers of the Dominion - which far outstripped the provinces - made it more suited to the task. This, is essence, is an argument for the use of the federal governments spending power to provide national programs. It would simultaneously alleviate fiscal burdens and ensure universal access to Canadians. The Canada Health Act replicates some of this thinking, using the financial power of the federal government to set national standards.

Constitutional changes as a result of the 1982 patriation would see a transfer of natural resource control to the provinces and the entrenchment of redistribution mechanism in the form of equalization payments. The former would be a boon to resource rich provinces - largely Alberta and later Newfoundland and Labrador - while the latter ensured the capacity of smaller provinces - the Maritimes especially - to provide comparable services despite smaller fiscal capacities and higher levels of unemployment. Two decades later, however, calculus of public finances was beginning to change once again.

In the present, the pendulum has swung away from the federal government and toward the provinces. No longer does the federal government hold the marquee portfolios. Rather it is the provinces with control over those programs which most closely and directly affect the lives of Canadians, namely health and education. At the same time, those files now claim a disproportionate slice of provincial budgets and continue to grow. This comes at a time when the federal government's overall investment in health care is at a proportional ebb. Increasingly provinces - excruciatingly exacerbated by recession - are unable to keep up with the fiscal demands of these two large policy areas. This is particularly true of Ontario which, lacking a steady stream of revenues from natural resources and facing existing economic and demographic challenges, is left particularly vulnerable. 

Further complicating the situation is a federal government that has all but abandoned the positive use of the federal spending power. While often described as a form of 'open federalism' which respects provincial jurisdiction and attempts to keep spending within Ottawa's own constitutional terrain, the rhetoric masks an overarching retrenchment of both the federal and, as a result, provincial capacities. Open federalism is sold by Prime Minister Harper as a positive relationship but it in reality it may simply undermine provinces by withdrawing needed funds.

At the federal level, the Conservative government has attempted to reduce the size and scope of the state by undertaking two parallel policy tracks. On the first front, it has overseen massive reductions in the size of federal revenues. It has done so largely along three axes. First, two-point reduction in the GST resulted in roughly $10 billion a year in lost revenues. Second, further reductions in the federal corporate tax rate have resulted in loses of $11.5 billion according to the Parliamentary Budget Officer. Third, promised changes to income splitting mechanisms and boutique tax credits will put further strain on federal coffers. These policy changes result in a net decrease in the capacity of the federal government to use its spending power by at least $20 billion a year, if not more. This is merely the revenue side.

On the spending side the equation is equally unbalanced. While consistently reducing revenues the Harper  government has ratcheted up public spending, particularly on the military. New commitments have including $35 billion in navel procurement and the spiralling costs of new fighter jets upwards of $30 billion. This figures exclude the costs of deficits and the increase in national debt (which simultaneously increasing the cost of servicing the debt). The result is a federal government which does little more provide military security while largely jettisoning any federal role in the social and economic well being of Canadians. Indeed, these changes are designed to lock-in future (non-Conservative) governments and hamstring the ability of future governments to expand the scope of what the federal government can do. In effect, the legacy of Harper's form governance is to reduce the national government to little more than debt-servicing and foreign adventurism. Given the general aversion to increasing taxes, any party wishing to repair the damage to Canada's social infrastructure federally will face an uphill battle.

This all has severe implications for the provinces, particularly Ontario. As the ability of provinces without potash or oil to pay for the vital services their citizens deserve dwindles, there are fewer options available. Provinces are saddled with programs which, given demographic pressures, become larger and larger without support from the central government. The lesson of Drummond is not that provinces are living beyond their means. On the contrary, the report suggests a new form of federalism is required that takes into account the present economic and social realities. During the Great Depression decisions were made to use the federal spending power to save the provinces from the precipice of economic collapse. Today, several province sit on the brink but no such pan-Canadian consensus is on the horizon. The Harper regime has all but abdicated the federal government's role as a positive force in the social well being of Canadians. It is a vision equally at odds from John A. MacDonald's vision as it is from the other federal parties. In the vacuum created by Ottawa's absence it seems the void will be filled by further retrenchment of state capacity to the detriment of Canadians.

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