The Federal government is poised to move into a period of fiscal surplus. According to the 2014 Federal Budget, the 2014-15 fiscal year will see a 2.9 billion dollar deficit (which could actually be a small surplus due to the 3 billion dollar contingency fund). After that, 2015-16 will see a 6.4 billion dollar surplus and the surpluses will grow in size reaching 10.3 billion dollars by 2018-19. Assuming there is no economic maelstrom on the horizon and these surpluses do indeed come to pass, what will the vision be for using this surplus? What should the vision be?
Until the 1990s, dealing with a surplus at the federal level was the subject of fiscal science fiction. Canada ran continuous deficits at the federal level from 1970-71 to 1996-97. The average deficit during this period was 20.6 billion dollars for a total accumulation of 555.4 billion dollars in deficits. From 1997-98 to 2007-08, Canada ran surpluses at an average of 9.5 billion dollars annually resulting in an accumulation of 104.7 billion dollars in surpluses. Deficits returned with the recession in 2008-09 and the period 2008-9 to 2014-15 generates an average deficit of 22.8 billion dollars and an accumulation of 159.4 billion dollars in deficits. Indeed, these last seven lean economic years have generated deficits that more than offset the surpluses of the previous eleven years. The projected surpluses for the coming era of plenty over the period 2015-16 to 2018-19 average out to about 8.2 billion dollars per year.
When federal finances returned to surplus in 1997-98, it came in the wake of cuts to transfer payments and spending and coincided with a booming economy and low interest rates that generated a fiscal dividend when it came to debt service costs. The surpluses went to tax reduction as well as new spending in health and university research. There was an eventual recognition that the transfer cuts of the 1990s had been harsh and new funding was needed. The escalator of the 2004 Health Accord was perhaps the single biggest use of the surpluses as the additional long-term funding from 2004 to 2014 amounted to 41.3 billion dollars plus there was a 16 billion dollar Health Reform Fund.
What are the results of this new investment? An evaluation of the ten-year plan to strengthen health care that was done by the Senate of Canada concluded the agreement and its investments resulted in some improvements in many areas:
“…including: improving access to certain health services related to cancer, heart, joint replacements, cataracts and diagnostic imaging; increasing the supply of health care professionals and acute home care services. Meanwhile, all jurisdictions had at least one component of an electronic health record… However, achievements in many of the areas identified by the accord were mixed. For example, though primary care reform was occurring across the country, it remained at the pilot project stage despite the creation of the $800 million Primary Health Care Transition Fund aimed at systemic change. Indeed, many of the discussions during the committee’s hearings focussed on how funding as part of the accord had increased the provision of services, but had not resulted in reform of health care systems, including the much needed integration of different health care sectors and the breaking down of silos....” (Standing Senate Committee on Social Affairs, Science and Technology, Time for Transformative Change, March 2012, p. 82) Indeed, the report noted that amongst the OECD countries, Canada had acquired one of the most costly health care systems and yet continued to rank 24th out of 34 countries when it came to benchmarks such as life expectancy at birth.
In the case of university education and research, money went into funding research chairs and new research programs and university enrollment expanded across the country but there are continual complaints that the shift in focus away from undergraduate education and towards research has not been in the best interests of students. In light of all this spending on transformative change that results in more spending and services but no fundamental transformation, how should we be approaching the new era of surpluses?
Aside from short term spending for the purposes of the upcoming election, how should we spend the money? The last era of surpluses emphasized tax reduction and public investment (health, education and infrastructure) though the results on the effectiveness of these priorities seems mixed. What should we do now? Do we continue with business as usual and pour the surpluses into more tax reduction and some additional targeted transfers in health, education and physical infrastructure? Do we use the surpluses to chip away at the public debt? How do we provide a new round of tax relief – as is currently being debated with respect to whether there should be income splitting or an enhanced child-care benefit? Should we use the surpluses to develop an Arctic Strategy given the coming international issues over developing the Arctic and assorted sovereignty claims? Do we invest in a national electricity grid that is hardened to deal with climate change? How about completing the Trans-Canada Highway so that it’s a four-lane divided highway from coast to coast (to coast?).
There are two issues here. First, the above suggestions are all piecemeal propositions. Where are the broad policy themes that should be the focus of more resources. For example, one theme is the rapid aging of the population over the next three decades and its effects on the Canadian economy and society. What does an aging population mean not only for health care but also the education sector, national infrastructure, urban and rural services, and the ability of the country to adapt to economic change. Second, what is the long-term benefit to any initiative undertaken and how will the benefit be measured? As we have seen from the last era of surpluses, simply spending more money does not always mean you get what you were expecting. If we are going to spend more on health, how do we ensure we get value for money and not repeat the mistakes of the past?
The Federal government has evolved from a provider of goods and services to a role mainly as a transfer agency transferring resources to individuals and to other governments. Government does not always need to have a big role in directly providing public goods and services provided it is willing to develop standards and regulations and monitor their private sector provision to ensure access to services, public safety and efficient and transparent operation of markets. This approach can also translate into the area of transfer payments. Just because the Federal government is transferring money to the provinces to spend on areas that are nominally under provincial jurisdiction does not mean there has to be an abdication of a national policy role when it comes to designing those transfers to achieve national goals or outcomes or ensure that all Canadians receive the best health care or education that they possibly can. There is also no reason why the Federal government cannot design new national transfer programs to deal with aging populations, aboriginal education or physical and human capital within the rubric of the nation building role laid out in the constitution – peace, order and good government. The first step is for the Federal government to actually acknowledge that it has a role to provide a national vision.