In March of this year, the new Liberal government released its first budget, forecasting a $30-billion deficit in 2016-17 alone. It remains to be seen whether the Liberal government will be able to reduce or even keep stable the debt-to-GDP ratio over the next four years. What is clear is that even with its commitment to deficit spending, the Trudeau government will need to free up fiscal space for its new priorities and new investments.
A review of current expenditures will be critical to providing some of the necessary fiscal room. It will help to identify administrative efficiencies, realign existing programs and eliminate lower-value, nonpriority activities. A review becomes even more essential if the government does not intend to increase taxes to generate new revenue.
A short history of past spending review exercises
The groundwork for this kind of regular, systematic and mandatory review of government expenditures was laid in Budget 2003. The Chrétien government launched an examination of all nonstatutory programs on a five-year cycle and committed to reallocating a relatively modest $1 billion per year from existing program spending toward new initiatives. The stated goal was to ensure the relevance, effectiveness and affordability of government programs.
In 2004, almost immediately upon taking office, the Martin government ordered an immediate freeze on major capital projects and established the new Expenditure Review Committee of cabinet. The committee, headed by John McCallum, then the revenue minister (now minister of immigration), was tasked with conducting an extensive and rigorous review of all government spending — and not just program spending but issues like procurement, capital management and human resource management that contributed to government expenses.
The results of the Expenditure Review Committee’s work were announced in Budget 2005, with nearly $11 billion in savings, the majority from improved efficiencies in purchasing, property management and service delivery.
These early exercises in review and reallocation of government expenditures arose in part out of the painful lessons of the preceding three decades. Between 1975 and 1984, Canada went from having one of the best fiscal performances among the G7 nations to having one of the worst, with a debt-to-GDP ratio approaching 50 percent.
In 1994, amid public musings about the country’s possible bankruptcy and credit agency downgrades, the newly elected Chrétien government launched its program review, an exercise designed to fundamentally restructure and realign the role of the federal government. The results of program review were announced in 1995 and 1996, with reductions in departmental budgets (Indian and Northern Affairs excepted) ranging from 5 percent to 65 percent, a 20 percent cut to the size of the core public service and, more controversially, significant cuts to provincial transfer payments for health and education. Program review led to the largest decline in government size and spending since postwar demobilization. As a result, by 1997-98, the federal government was running its first surplus budget in 28 years, followed by 10 more years of surpluses. (Jocelyne Bourgon, who served as the Clerk of the Privy Council from 1994 to 1997, has written an excellent overview of program review and the history behind it.)
Spending review under the Harper government
It is no surprise, given his role as finance minister during the program review crisis, that Paul Martin placed such an emphasis on careful, pre-emptive management of government expenditures during his tenure as prime minister. When the Harper government was elected in 2006, it continued in the direction set by Chrétien and Martin, paying down an additional $37 billion in debt and reducing the debt-to-GDP ratio to a low of 28 percent by 2008-09. Harper instituted a new multiyear program spending review process in 2007 under the rubric of “strategic review.”
Strategic review was designed to ensure that government program spending was providing value for money. Program spending by every department and agency receiving public funds was reviewed on a four-year cycle by the Treasury Board, with results announced annually as part of the budget process. Each department or agency was asked to meet 5 percent reallocation targets and to present recommendations for reinvestment of those funds into higher-performing and higher-priority areas. By the end of four years, over 98 percent of program spending had been reviewed and assessed. Statutory programs, including transfers to other levels of government and to individuals (for example, EI benefits and benefits for children and the elderly), were excluded from review. No overall reallocation target was set, but the first cycle of strategic reviews ultimately identified $11 billion over seven years, and $2.8 billion ongoing, for priorities like the new Canada Student Grant program, additional support for research and innovation, and targeted tax reductions.
Strategic review was the first successful attempt to institutionalize and regularize the review of government expenditures.
Strategic review was the first successful attempt to institutionalize and regularize the review of government expenditures. Like expenditure review in 2004-05, it was designed not as a savings exercise but rather as an exercise in good management, with departments required to assess whether programs were aligned with government priorities and core federal roles, provided value for money and were as effective and efficiently run as possible. In addition, for the first time, members of Parliament were formally involved in the review process through caucus advisory committees that reviewed and provided valuable political feedback on savings proposals. Because the government was not attempting to review 100 percent of program spending in a single year, a separate cabinet committee was not required to manage the workload (though the added burden on the Treasury Board was not insignificant).
It is no surprise that when the global financial crisis hit in 2008, Canada was well positioned to respond, given the preceding decade’s efforts at prudent fiscal management and the spillover influence of those efforts on the financial sector. The Conservative government rolled out an aggressive economic stimulus plan that was timely, targeted and, most important, temporary in nature. Canada emerged from the ensuing recession faster and stronger than any other developed country, and deficit spending was quickly wound down as the economy recovered. The debt-to-GDP ratio rose briefly to 33 percent during the recession years, falling again to 30 percent by 2015.
A key part of the Conservative government’s postrecession fiscal consolidation plan was the strategic and operating review (subsequently rebranded the Deficit Reduction Action Plan), which subsumed and replaced the strategic review process.
The goal of the strategic and operating review was to achieve at least $4 billion in ongoing savings by 2014-15, with 67 departments and agencies being asked to identify proposals representing 5 percent and 10 percent of their expenditures. Unlike strategic review, the strategic and operating review focused on administrative and operating expenses rather than program spending; ultimately, savings in those areas made up more than 70 percent of the final $5.2-billion total.
Like Martin’s expenditure review, the strategic and operating review was a massive cross-government review effort, conducted within a compressed timeframe and overseen by a separate, dedicated subcommittee of cabinet. Once the strategic and operating review had concluded in 2012, the Harper government did not reconstitute the regular strategic review process; however, a separate body, the Treasury Board Subcommittee on Government Administration (composed of both ministers and Conservative backbench MPs), was established in order to look at system-wide issues like procurement and disability management, identify horizontal savings and maximize opportunities for realignment of program and service delivery. Unfortunately, that subcommittee was not given specific reallocation targets, nor was anyone accountable for specific accomplishments. It also didn’t receive much support from Treasury Board or the Privy Council Office, and it was not identified as a priority by the Prime Minister’s Office.
It is clear from the work of the last 12 years, under Liberal and Conservative governments alike, that regular review of program and other government spending is essential to ensuring both fiscal sustainability and the availability of resources for new priority initiatives. Without regular pruning, government quickly grows unchecked, with new programs layered onto old in a kind of archaeological stratification. The Trudeau government has an ambitious agenda, and if it does not want to constrain demand or increase taxes, program review will be an important component of protecting Canada’s hard-won fiscal stability and reputation for fiscal prudence.
However, apart from the fiscal benefit, spending reviews are also simply a matter of good management. Rooting out waste or inefficiency, or realigning programs so that they better achieve desired outcomes, or identifying new technologies that allow for improved delivery of programs and services benefits everyone – taxpayers, program recipients and government alike. Other jurisdictions similar to Canada, including the UK, Australia and the Netherlands, conduct regular, scheduled reviews of a fixed portion of government spending. These are not exercises in austerity but the use of responsible management, allowing for resource shifts in response to new developments or a change in government strategy.
The history of spending review in Canada thus far has been one of ad hoc, one-off government-wide exercises conducted within extremely short timeframes.
What is equally clear is that expenditure review should be done in a regular and systematic way. The history of spending review in Canada thus far, with the exception of the 2007-11 strategic review, has been one of ad hoc, one-off government-wide exercises conducted within extremely short timeframes, often in response to external pressures. These resource-intensive operations are challenging to manage and invariably distract from the regular business of government. Because of time constraints and lack of clear accountability beyond the department level, they do not allow for adequate horizontal review of program spending by area (for example, for youth or for indigenous people). This means that programs with similar objectives run by different departments are not considered together, either to eliminate overlap or to determine the synergies that might be achieved. One-off reviews within a compressed timeline also do not permit departments, either separately or together, to consider truly new and innovative ways of realigning programs or service delivery.
Regular reviews require a separate, dedicated capacity, both within the bureaucracy and at the cabinet level, to conduct the reviews themselves but also for ongoing monitoring and follow-up. They require clear metrics, beyond a simple numbers assessment, to assist in determining which activities provide real value for money. While the Treasury Board Secretariat has made a great deal of progress on that front in the last decade, there is still more work to be done with respect to aligning programs and outcomes.
Proper metrics are also vital to managing stakeholder reaction to any change in program spending. And, of course, regular reviews require political will and close political oversight, a lack of which hindered the work of the Subcommittee on Government Administration. Members of Parliament are particularly useful in this respect, since they have the time and knowledge to engage in assessment of potentially sensitive reallocation proposals.
It is perhaps not surprising that large spending review exercises have been conducted at the beginning of political mandates in Canada, since the expectation is that they will require significant political capital to conduct. Indeed, Chrétien’s program review was arguably possible only because addressing the country’s deficit and debt crisis had finally become a priority for Canadians. However, in both Martin’s expenditure review and Harper’s strategic and operating review, the bulk of the savings was realized from back-office administration or changes to internal operating procedures. The service impact on Canadians was virtually nil. Regular reviews, if properly conducted, would eliminate the need for larger exercises that are focused only on reducing the deficit. And regular reviews would serve to “normalize” the exercise of reallocation, so that the decision-making about which priorities and programs to fund would ideally become an expected and transparent part of the budgeting cycle.
Thanks to the difficult decisions made and the discipline exercised over the past two decades, Canada is in a particularly enviable fiscal position. Coming out of the worst worldwide recession since the 1930s, Canada now has the lowest debt-to-GDP ratio of any G7 country and positive (if modest) prospects for growth. Successive fiscal consolidation policies and careful management of expenditures under the Chrétien, Martin and Harper governments have given the current government plenty of room to manoeuvre. However, the lessons of the ’70s and ’80s demonstrate how quickly things can spiral out of control and how quickly recurrent “stimulus” spending can become a debt hole requiring drastic action to correct. Without a clear plan to return to balance, there is a real risk that within a decade we will be back to 1995, with the prospect of another painful program review exercise looming. Ongoing, pre-emptive review of government expenditures will be one critical way to avoid that fate.
Photo: CarpathianPrince / Shutterstock.com
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