No New Spending - Reallocate What's There

The government basically has two choices available to them to finance these new expenditures: increase taxes or decrease other spending. Financing the expenditures using deficits will simply defer the decision of higher taxes or lower spending for the future.

Given the horrendous events of September 11th and the importance of both homeland security and fulfilling Canada’s international commitments, new spending on security and national defence is warranted. This new spending should not, however, be accompanied by higher taxes but rather should be funded by the elimination of other spending.

The key to financing new defence and security spending, while controlling the size of government is the rationalisation and prioritization of current spending in other portfolios. In other words, the federal government should get back to providing those core services, like national defence and security which we actually need them to while getting out programs like corporate subsidisation and regional development.

Using historical measures of defence and security spending, such as the percentage of government expenditures or the percentage of GDP provides some estimates of how large the spending increases being contemplated may be.

In general, spending on the protection of persons and property has been falling significantly both as a percentage of total government spending and as a percentage of GDP. In 1966, the first year for which data is available, 13.2 percent of all government expenditures were on the protection of persons and property. This includes national defence, police and correctional services, fire fighting—in other words, some of the core responsibilities of government.

Spending on the protection of persons and property is currently estimated at 7.8 percent. Put differently, between 1966 and 2001, the percentage of government spending devoted to the protection of citizens and property declined by an astounding 40.9 percent. If Canadian governments were to return to the 1966 level of spending on the protection of people and property relative to total expenditures, it would require a re-allocation of $22.5 billion from other departments.

Another way of looking at the potential increase in spending on security and defence is to relate these expenditures to GDP. In 1966, expenditures on the protection of persons and property consumed 3.9 percent of GDP. It currently stands at 3.1 percent of GDP. In other words, as a share of the economy, expenditures on the protection of persons and property have declined by 20.5 percent between 1966 and 2001.

If Canadian governments were to return to spending 3.9 percent of GDP on the protection of persons and property, a re-allocation of some $8.6 billion would be required from other departments.

Yet another way of looking at the serious decline in government expenditures dedicated to the core role of protecting citizens against aggression, both foreign and domestic is by viewing the national defence budget. A little known fact regarding the federal Liberals belt-tightening exercise since coming to office in 1993 is that defence is the only area of direct spending by the federal government in which cuts were implemented. In fact, between the 1993/94 and 2000/01 fiscal years, real defence spending dropped 15.7 percent, from $14.0 billion to $11.8 billion.

The new reality we find ourselves in after the horrendous events of September 11th requires additional spending on the protection of persons and property. Historical comparisons imply that said increases in spending are most likely to be significant and permanent.

The only lingering question then is how best to finance this new spending. The last thing Canadian governments should do is increase total spending and therefore increase taxes. What needs to be done, and incidentally what The Fraser Institute has been recommending for years is a re-prioritization of government spending. That is, get governments back to doing those things we actually need them to do, like national defence, and out of areas they shouldn’t be involved in to begin with like subsidising businesses.

Let us assume that the new spending will amount to roughly $5 billion per year—a middle of the road estimate. These funds should be found within the current spending limits. The federal government should eliminate transfers to Crown corporations, subsidies to business, and regional development spending, to name but a few. A portion of the savings from these measures can be reallocated to defence and security-related programs. This would enable the federal government to meet its tax reduction commitments announced in 2000 while fulfilling its core responsibility to protect persons and property.