Visioning the Surplus

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 24^th 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. 

 

Comments

[Nhick]

Nice goal, hope to see improvements.

[stan]

This isn't precise, but the build our own ships plan, and the fighter replacement, will eat a lot of money, also brp was awarded contracts to develop a moon buggy as well as a mars buggy, and if we want the CSA, to actually send those things off world, that will be expensive as well.

[Min]

Why do anything with a surplus? If, indeed, it is result of increased economic activity, then spending the surplus is counter-cyclical. Then when the next slump comes, the deficit will be bigger than otherwise, causing fear and potential cutting back, which is also counter-cyclical. Counter-cyclical policy increases economic instability.

[Ralph Musgrave]

The above article has got macro and micro mixed up. When a microeconomic entity enjoys an $X surplus, that’s $X flowing into its coffers which it can spend.

In contrast, where a government is in surplus (and assuming full employment) that just means the private sector is relatively boyant, aggregate demand is relatively high as a result, and thus government needs to rein in demand by running a surplus so as to avoid inflation.

At least I assume the above mentioned 2015-16 surplus is based on the full employment assumption. If it’s not, then the assumption that there’ll be a surplus doesn’t make sense. That is, given excess unemployment, government ought to cut the surplus (maybe to nothing), or even run a deficit.

In short, given the full employment assumption, a surplus is just not money that government can spend. If it did spend it, there'd be excess inflation.

[Determinant]

I want a national pharmacare plan. If the Brits can have it with the NHS, why can't we? We can file it under Section 94 and let the Feds be second-payer to the provinces, just like with CPP/QPP.

As for policy specifics, take the new New Brunswick plan and make it national.

That is all.

[Min]

Oops! I said "counter-cyclical" when I meant "pro-cyclical". :( I think that most people caught that, though.

[Chris J]

The tories just successfully shrunk government by > 10%. Before the crisis we were sitting at about 16% GDP in revenues and now we will have the books balanced at 14%. (Source: plots posted in WCI ;) ).

I think the tories will find another popular tax cut and shrink revenues more. Then they will cut spending to rebalance after a few years.

Wash, rinse and repeat.

The conservatives want to shrink government and exploit natural resources faster and with fewer rules. They are succeeding.

[Avon Barksdale]

Almost all of the issues discussed in this post should be handled by the private sector. The idea that surpluses should be spent is just silly. Remember, it is the expectation of future surpluses that allows governments to borrow in the first place.

The is no economic reason to think that government should have any role in post-secondary education (pure research perhaps, but not broad based publicly funded institutions). As for an ageing population, again there is no special role for government.

I wish big-government economists were more consistent. Unless you can sensibly identify where the Welfare Theorems have failed, you have no reason to think that you can engineer society better than a free market. Furthermore, if you think transfers that maximize some imagined joint utility function is important, then logically you need to start with tags and one of the best tags is height. That is, if you really believe that wealth redistribution is an important role for government, we should impose a height tax as height not only correlates strongly with wealth, it also correlates strongly with potential success in life. If a height tax strikes you as ugly or unfair, then you don't really believe in redistribution for joint utility maximization reasons. Big-government economists also fail to tell us why redistribution within the country is so important, but redistribution outside the country is not. If redistribution is important to an economy, then why limit it at an artificial border? Why do free market principles apply globally, but redistribution does not? Seriously, why not send 1/3 of all our tax revenue to Africa if redistribution is so important?

Finally, even if you can identify a failure of the Welfare Theorems, we should be very hesitant to use the power of the state to correct the situation. In many cases (perhaps most) government just makes the market failure worse. Government monopoly is the worst kind of monopoly as the rent seeking industry comes out in full force to prevent any future change or innovation that would threaten the original economic reason for the government monopoly. At least a free market would constantly look for ways to get around a private monopoly.

Use the surplus to reduce the size of government, period. Friedman put most clearly, "I am favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible."

[Min]

"Unless you can sensibly identify where the Welfare Theorems have failed, you have no reason to think that you can engineer society better than a free market."

If you are going to rely upon the Welfare Theorems, you have to show that their assumptions are warranted. Besides, you make a false dichotomy between a free market and an engineered society.

[Avon Barksdale]

The Welfare Theorems sit at the center of the foundations of all economics. As all economics is a parable to a more complicated picture, the Welfare Theorems are strictly an approximation. Nevertheless, the degree to which they get violated is paramount to policy. In the vast majority of cases, the Welfare Theorems hold so closely that there is no meaningful way in which a central planner could possibly hope to improve the situation. The issue isn't an imperfect market vs. a perfect, benevolent social planner; it is reasonably efficient markets vs. imperfect government and attendant rent seeking.

It is not a false dichotomy between an engineered society and a free market. We must remember that the organizing principle behind government is coercion and conformity, while free markets are based on voluntary interaction and unanimity. If we won't use prices and voluntary trade, we are only left with force. For those who are in charge, how do they know better?

[Min]

Avon Barksdale: "free markets are based on voluntary interaction and unanimity"

Open your eyes.

[Avon Barksdale]

Really, Min? Corporations advertise all the time - on TV, in print on the internet, etc. Ford tells me the have a great car, so does Toyota. Apple tells me they have great products, so does Microsoft. All these companies are trying to persuade me. If they can't convince me, I don't buy their products. I will only buy what they have to offer if it makes me better off. They will only sell to me if it makes them better off. If either one of us feel that we will not be made better off, we won't transact. That is, we must unanimously decide that we are each made better off before we trade. All these companies have to convince everyone who buys from them that their products makes their customers better off, unanimously. No company gets to use the police department to make you buy their stuff.

This is not how government works. The government only has to convince some people, not all, and in many cases just a minority. And once the government has convinced only the numbers it needs, everyone gets the same solution. You want less corporate welfare? Too, bad. You want more highways? Too bad. And so on, and so on, and so on,...