Why is the Government Cutting $5.2 Billion?

Budget 2012 committed the government to cutting spending by $5.2 billion annually. This followed months of uncertainty as to how big the cut would be- as low as $4 billion, as high as $8 billion. It was a nice compromise.

This commitment followed a decision in the 2010 budget to cut defense spending, capping the International Assistance Envelope at $5 billion and freezing the operating budgets of all government departments for two years.

In both budgets, the government stated that the savings would be found primarily through greater "efficiencies".

Cuts to defense and International Assistance did, nevertheless, account for one-third of the expenditure cuts.

There was little information provided in the 2012 budget as to what programs or services would be cut to achieve the $5.2 billion in savings. The President of the Treasury Board stated that the details might not emerge until 2013. This was a little pessimistic as the impact on departments is now coming out bit by bit.

Canadians are becoming concerned with the lack of information and lack of transparency of the government. This could become a communications nightmare for the government. Just as disturbing is that Parliament is being asked to approve spending for 2012-13 without the details to support the spending requests.

So why did the government feel it had to cut federal spending? There are three possible explanations.

First, did the government cut spending because there was a fiscal crisis as there was in 1995? Apparently not, because there is no fiscal crisis. The government's own numbers, provided in budget 2012, show that without the $5.2 billion in cuts, the deficit would still be eliminated over the medium term. The debt burden would fall, as would spending, as a share of GDP. Canada would continue to have the best fiscal performance in the G-7.

Second, did the government cut spending because they believed that the deficit contained a structural component that would not be eliminated without cuts? This has been a view of the PBO and 3dpolicy for some time, but it is a view that has been repeatedly rejected by the government. The government has continually shown medium-term forecasts in which the deficit disappears entirely as a result of economic growth.

Third, did the government cut spending for purely ideological reasons? The government recognizes that since 2006 spending has risen dramatically as has the size of the public service. The government is also aware that during the 2009-10 recession the deficit reached an historical high although much of that was due to the temporary stimulus spending. Both these developments eroded the government's claim to fiscal conservatism and small government.

It seems only logical that the government would want to establish some sort of fiscal conservative record. The government needed to show its conservative base that it could cut spending just like the Liberals did in 1995. Well they certainly failed because these cuts pale compared to the cuts by the Liberals. If anything the conservative base probably feels that the government doesn't really want to cut spending or doesn't know how.

In coming weeks and months and indeed possibly years, Canadians will begin to see what the federal government means by smaller government. Already information is beginning to dribble out on the number of employees that might be affected by the cuts in government departments and agencies. But so far there has been little information on the actual services and programs that will be eliminated.

The government may continue to claim that savings will be achieved through efficiencies without cutting programs and services.

This is simply not possible. Programs and services will need to be eliminated if the savings target is to be realized. If not, watch for another Treasury Board exercise to increase spending due to "health and safety" concerns.

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