PM 'tightening the screws' on government: mentor
The Canadian Press
Published Sunday, March 2, 2008 5:33PM EST
OTTAWA - Perhaps the most significant act of the Harper government is being conducted so slowly, steadily, and silently that it has raised barely a whisper of public debate.
After three Conservative budgets, the Government of Canada has been made financially incapable of offering costly new social programs or significant tax cuts for the foreseeable future.
Remember the national day-care plan the Liberals talked about when the country was awash in $13-billion annual surpluses? Or the Kelowna treaty to deal with aboriginal poverty?
Those surpluses are now almost gone.
A mentor and advisor to Stephen Harper applauds the prime minister for working toward a long-standing conservative dream -- a less-present federal government -- and for doing it without any backlash.
Tom Flanagan says Conservatives are gradually "tightening the screws on the federal government,'' leaving more money in taxpayers' pockets and making it harder for Ottawa to spend.
To launch any big-ticket initiatives over the next few years a prime minister -- whether Harper or a successor -- would either need to risk political suicide or hope for an economic miracle.
That's because raising taxes, returning to a deficit or slashing existing programs could be the only ways to pay for new spending, barring an unexpected economic boom.
"They've gradually re-engineered the system. I'm quite impressed with it,'' said Flanagan, who ran the 2004 Conservative campaign and has been a longtime confidant and former chief of staff to Harper.
"They're boxing in the ability of the federal government to come up with new program ideas . . . The federal government is now more constrained, the provinces have more revenue, and conservatives should be happy.''
With only a minority government, says Flanagan, Harper could never have taken the instant slice-and-dice approach of the Mike Harris Tories during Ontario's Common Sense Revolution.
Instead the prime minister has taken one cautious step at a time.
The Tories actually boosted spending dramatically in their first two budgets, often on conservative-friendly measures like tax credits for families, an equalization hike that went largely into provincial tax cuts by the Quebec government, and new military equipment.
There were no major budget cuts, with rare exceptions like the now-scrapped Court Challenges Program and Status of Women Canada which had long been targets for Conservatives.
While overall spending went up, measures were taken to deplete revenues. There were the GST cuts worth more than $11 billion annually, income tax cuts, corporate tax cuts, bigger provincial transfers and income-splitting for seniors.
Some other measures will accelerate over time, Flanagan says, like Employment Insurance reforms and tax-sheltered savings accounts from this year's budget.
Now the economy appears to be slowing down and spending increases are being curtailed considerably to avoid a deficit. The budget surplus has shrivelled from $13 billion last year to projected surpluses of $2.3 billion, $1.3 billion, $3.1 billion, and $4.7 billion over the next four years.
That means Ottawa can no longer wade into provincial jurisdictions like education and health care -- forcing it toward a more minimalist agenda if it wants to keep the books balanced.
Flanagan says that in the prime minister's step-by-step approach, spending control was the last piece to fall into place.
"Harper really didn't have the option of the cataclysmic approach because you can't do that without a majority,'' he said in an interview.
"So he's made the incremental approach work -- all the time having the insecurity of a minority government.
"It's really quite a performance, I think . . . Over a period of a few years they've got all this in place and they never appeared -- at any one point -- they never appeared to be making a radical shift.
"But the cumulative impact of all these together is creating a new profile.''
Not only are the Conservatives boxing in the federal spending power in general, said Flanagan, "they're also boxing in the Liberals from being able to campaign on expensive promises.''
The Tories are fond of pointing to John Diefenbaker and noting that federal revenues as a share of GDP will fall by 2010 to their lowest level since The Chief was in office.
In fact, federal revenues will drop to their lowest level since Lester Pearson's early days in office. They were at 14.9 per cent of GDP in 1963-64, grew to a high of 19.5 per cent in 1974-75, and are now projected to drop to 15.3 per cent in 2009-10.
But the world is not the same place it was in 1963 -- nor are the financial pressures on the Canadian government.
That 1963 figure was posted before Pearson's Liberal government introduced medicare, the Canada Pension Plan, and Canada Student Loans, and before the skyrocketing rates of post-secondary education.
Take Canadian universities as an example.
They've had 20-per-cent enrolment growth in the last decade alone and face increasingly intense international competition to build world-class research facilities. Canada's economic future hinges in part on their success.
Recent federal budgets had featured overall spending increases of six per cent a year. This year's budget still projects an increase -- albeit at a much slower rate of three per cent -- to $208 billion. But spending may need to be trimmed next year if current surplus projections are correct.
One economist has expressed concern that Ottawa is teetering on the edge of a deficit for the first time in a decade.
RBC's Derek Holt warned that the federal government will have its "hands tied'' for at least three years, and that measures in the latest budget will cut even deeper into the federal kitty for years afterward.
"The amount of foregone revenues is just going to skyrocket,'' said Holt.
"Even within the first five years (of the new tax-free savings account) it's almost a $1 billion cumulative price tag. Longer-term, that number only multiplies by itself as the portfolios compound.
"Over time, they're going to whittle away at the taxes on investment income pretty aggressively over the next 10, 20 years.''
All the same, not all small-c conservatives are happy with the prime minister.
Gerry Nicholls worked closely with Harper at the National Citizens' Coalition and compares him to a chess master who always thinks a few steps ahead of everyone else.
But Nicholls wishes this chess master would cut spending a little faster -- and then reduce taxes. He's not impressed by arguments that the federal government is already being run into a fiscal wall.
"Basically what the strategy is, it seems to me, is spend so much money that there's nothing left for the Liberals to spend,'' Nicholls said.
"That's not fiscal conservatism. That's the opposite of fiscal conservatism.
"That's like saying the way to beat alcoholism is to keep drinking alcohol until you pass out -- so then you can't drink any more.''
He says the Harper approach may be great politics because it handcuffs the Liberals. But it's lousy economics, says Nicholls, and an especially disappointing performance from a "fiscal hawk'' like Harper.
As for the politics, the opposition may need to perform some creative budgeting to deliver any significant spending promises in an election campaign.
"We certainly haven't abandoned our vision on aboriginals or child care or anything else,'' said Liberal finance critic John McCallum.
"But this does make it somewhat more difficult for us to do these things -- at least quickly.
"They've left us only a minor crisis away from going into deficit. But if history is any guide -- and it may or may not be -- over time, surpluses will turn out to be larger than they currently are.''
Flanagan insists the last three Conservative budgets have left the Liberals cornered. And he isn't bothered by those on the political right, like Nicholls, who criticize the prime minister for not being drastic enough.
"Part of the execution of the plan was that there would be conservatives attacking him -- like John Williamson (of the Canadian Taxpayers Federation), Gerry Nicholls,'' Flanagan said.
"That's extremely useful, to have that kind of pressure there, berating the prime minister for not doing enough.''