The mid-1990s were a period of remarkable transparency in Canadian politics. In 1993, the federal Liberals published their famous Red Book and, after an electoral tri- umph, went ahead and governed from it ”” more or less. Even more famously, in 1995 Mike Harris’ Ontario Tories ran and were elected on a very detailed plat- form ”” the Common Sense Revolution ”” and then proceeded to implement a good deal of it.
That politicians were willing to be held to account for their promises was clearly a very good thing for politics, not least because it presumably caused them to temper their promises.
In 1997, the federal Liberals ran and were elected on Red Book II, the first political platform of the post-deficit age. The cornerstone of that manifesto was the famous 50-50 pledge. Half of the emerging federal surplus would be used to finance new expenditure programs and half would be devoted to tax cuts and debt reduction, though in what proportion was not stipulated.
There was nothing magical about the formula. It was clearly the result of a compromise between the Liberal Party’s activists and its fiscal conserva- tives. And there was some doubt about how closely it would be followed. On several occasions the Department of Finance let it be known, more than once through its minister, Paul Martin, that the rule would not stand in the way of good policy.
Maybe so, but it still stands as the official position of the Liberal Party. Red Book III, a leaflet hardly worthy of the name, did not retract it. And yet it is not much talked about these days and was not even mentioned in February’s federal budget, which is strange, since a budget is the government’s annual statement of what it’s going to do about expenditure increases, tax relief and debt reduction. Apparently, we are now at fiscal sea without a rudder.
Apparently, but not quite. If you dig deep within the Budget Plan that Finance Minister John Manley pro- duced on Feb. 18, way back on p. 222, you find Appendix I, a compendium of ”œSpending and Tax Relief since the 1997 Budget,” which, you’ll recall, was the first budget in three decades to record a surplus. Appendix I doesn’t mention the 50-50 rule, either, but its purpose is clear: to show that since 1997 the government has been living by that rule, more or less.
Now, it’s easy to understand why this discussion is buried in an appendix of the Budget Plan. In terms of the 50-50 rule, the 2003 budget is the worst the Liberals have produced. The summary tables in Appendix I make note of 78 separate spending initiatives ”” 78! ”” totaling $6.4 billion in the current budget year, $3.99 billion in fis- cal year 2003-4, and $4.97 billion in fis- cal year 2004-5, for a total of $15.35 billion (without the rounding) in this and the next two fiscal years. By com- parison, the budget lists only 18 rev- enue initiatives totaling $2.3 billion from now until 2004-5. That’s just 13 percent of all the initiatives in the budget, both revenue and expenditure.
You’ll note that debt reduction is not mentioned. That’s because, while the government is willing to project spending and taxes, it doesn’t want to count its debt reduction eggs until they’re hatched. If it does manage to save the contingency reserve over the three fiscal years in question, that would add $9 billion in debt reduction to the calculations, making the split: tax cuts 8.6 percent, debt reduction 33.8 per- cent, new spending 57.6 ”” which isn’t that far off the 50-50 rule, though tax- cutters won’t be pleased by the division between tax cuts and debt reduction.
On the other hand, there’s the prob- lem that some tax initiatives are really spending initiatives in disguise. For instance, $50 million of extra ”œfilm or video production services tax credits” are really an expenditure designed to help the film or video industry. The same with ”œimproving tax incentives for renewable and alternative energy” and increases in ”œsmall business deductions” (which are not meagre business deductions but deductions for small business). A tax cut is when the government lets you keep your money and do with it what you want. When it lets you keep it only if you do with it what the government wants, that’s really government spending. Tax expenditures of this sort should really be counted as increased spending.
To be fair, the Department of Finance seems to understand that. In its grand compendium table (Table A1.1) it lets the reader decide whether tax expenditures represent spending or tax cuts. The total amount of spend- ing, tax cuts and debt reduction from 1997-98 to 2004-05 (not counting debt reduction from the current fiscal year on) is $331.1 billion. Counting new tax expenditures as spending, the breakdown is: spending 46.4 percent, tax cuts 39.3 percent, debt reduction 14.4 percent. Counting tax expendi- tures as tax cuts, the breakdown is 39.7, 45.9, 14.4.
So, yes, despite appearances the 50-50 rule does still seem to be with us.
Next question: is it a good rule?