Cost of the public sector in Canada

VANCOUVER -- According to much of the country's political left, the principal problem holding back the Canadian economy and chipping away at social equity is a pubic sector that is inadequately resourced.

From the federal NDP to the Canadian Labour Congress and the Canadian Centre for Policy Alternatives, one hears a constant refrain that, because of previous tax cuts and finance ministers who are too timid to ignite the engines of public spending, governments simply aren't "investing" enough in programs, services and infrastructure.

This narrative suffers from several weaknesses, the most important being it is supported by data on the size and spending activity of the public sector.

If we take all levels of government together, by 2011 their overall expenditures reached $700 billion, measured on a national accounts basis (which differs slightly from the public accounts data reported in annual government budgets). Courtesy of the Fiscal Reference Tables published by the federal Department of Finance, we learn the same governments collectively spent $434 billion in the year 2000.

Thus, during little more than a decade, government outlays in Canada climbed by a sizable 61 per cent. During the same period, inflation, as proxied by the all-items Consumer Price Index, rose by 26 per cent, while the country's population grew by 13 per cent. On the surface, this picture doesn't convey the impression of a dramatically shrinking leviathan.

Next, consider the revenues the country's numerous governments collect to pay for the services, programs and income transfers that comprise the expenditures discussed in the preceding paragraph.

By 2011, Canada's public sector was pulling in close to $650 billion (again, measured on a national accounts basis). In the year 2000, the revenue haul was $468 billion -- meaning government revenues have risen by almost 40 per cent since the start of the millennium. That government spending rose by more than revenues from 2000 to 2011 reflects the fact Ottawa and some provinces have been running substantial budget deficits in recent years.

In Canada, the provinces combined account for a larger slice of public spending than the federal government. But there are significant divergences in the size of the state across the provinces. In 2011-12, provincial program expenditures, measured as a share of gross domestic product (GDP), ranged from less than 14 per cent in Alberta to 28 per cent in PEI.

The provinces also differ markedly in the amount and relative burden of the debts they have accumulated over time.

By fiscal year 2011-12, provincial net debt per person ranged from a high of $21,400 in Quebec to a negative per capita debt of $4,000 in Alberta -- which is in the fortunate position of having net government assets rather than net debts. For its part, the federal government's debt adds up to just under $17,000 on a per person basis.

What is the optimal size of the state? Both scholars and citizens differ on this basic question of political economy, and there is no "right" answer.

By the early 1990s, the broad public sector in Canada had grown to the point where it amounted to half of the nation's economy, according to data assembled by the Organization for Economic Cooperation and Development. This is not far short of where some European countries (including Portugal, France and Greece) are at today. By the early 1990s, years of ballooning budget deficits had served to drive up the government spending-to-GDP ratio, both nationally and in most of the provinces.

From the mid-1990s until the onset of the global recession in 2008-09, the Canadian public sector's economic footprint steadily diminished, as budget deficits disappeared or turned into surpluses, and taxes were reduced.

The OECD estimates overall government expenditures now constitute approximately 42 per cent of GDP.

This is lower than in the 1980s and 1990s, but the public sector in Canada remains a much bigger economic and social force than it was during most of the 20th century.

By any standard, government exercises substantial control over the nation's economic resources and has a large presence in the lives of Canadians. While some would like to see the public sector expand further, so that it represents 50 or even 60 per cent of GDP, following this path would necessitate significantly higher taxes across myriad revenue sources -- personal and business income taxes, consumption taxes and payroll and property taxes, among others.

Moreover, it's hard to believe governments in this country can't provide an appropriate volume and quality of public services and programs with the roughly $675 billion in revenues they are on track to collect in 2012.

Jock Finlayson is executive vice-president of the Business Council of British Columbia.

Republished from the Winnipeg Free Press print edition May 29, 2012 A10