To change the trajectory of federal spending, start big and follow the money

by Michael Wernick. Originally published on Policy Options
September 6, 2021

Political parties don’t like to talk about spending cuts ­– except perhaps to insinuate that the other parties have some hidden agenda. They try to project to voters that they can be trusted to manage the finances of the federal government, but details will always be sketchy. Campaign promises tend to be specific about shiny new programs, and occasionally about the reversal of measures the previous government took. But, generally, political parties are very vague on how to get to fiscal targets. Every party platform should end with the warning: “check against delivery.”

To paraphrase the misquoted remark attributed to Kim Campbell, an election is not seen as a great time to discuss serious matters. But Canadians should start asking for more clarity during the current campaign. Over the past 30 years, successive federal governments, blue and red, majority and minority, have put in place a wide variety of approaches to dampen the growth of, or to actually reduce, federal spending. Canada has been through many rounds of open political debate about various cuts by past governments, and we have learned a lot about the long-term consequences of these decisions.

If you really wanted to change the trajectory of federal spending, you would start with the biggest programs and uses. Follow the money. You would start any review from as broad a base as possible because the more items you take off the table, the more you may have to cut from what is left to get to any numerical target.

But that isn’t how government really works. Not all dollars are equally cuttable. Some have powerful defenders, from provincial premiers to organized stakeholder lobbies, who can inflict real political pain. The first uncomfortable question to ask a politician about spending is which dollars are on the table and which ones are off.

What is actually cuttable?

It takes only a dozen questions to quickly sort out how little spending is politically expendable for any government and to reveal a lot about their intentions. You may recognize how some of these issues played out in the past. To ground any discussion of federal spending in hard numbers bookmark the government of Canada InfoBase.

• Federal transfers to provinces? Cap or reduce the rate of the growth of any of them?
• Equalization? Cut back the $20 billion-per-year program and divvy up less money in future?
• Infrastructure projects? Cancel projects or reduce the federal contribution? In which of the five categories currently funded?
• Old age pensions? Limit or suspend the indexing to inflation or raise the eligibility age?
• Employment Insurance? Do we change the rules for qualifying? The generosity of benefits? Fishers’ EI? Parental benefits? Disability benefits? Would you run a surplus in the EI program to contribute revenues to the rest of government?
• Pay and pensions of public servants and RCMP?
• Major procurements of equipment by the military and the Coast Guard?
• Programs for farmers?
• Payments or services to military veterans?
• Transfers to Indigenous governments and service agencies?
• National security, intelligence and law enforcement agencies (including the Canadian Security Intelligence Service, the RCMP and the Canadian Board Security Agency)?
• Officers and agents of Parliament?

If you could somehow secure candid answers to most, or any, of these questions, you would have an idea of the realistic starting point for any spending review. You would also see the inexorable math faced by all finance ministers. Because the uncuttable programs will continue to grow – spending will continue to go up with inflation, population and use of the programs – it will then be necessary to be even tougher on the expendable programs to hit any reduction target. Finance ministers prefer to have more time to reach any goals and tend to like measures that may start small but will harvest a growing dividend of future cost avoidance.

The design of the review affects the outcome

There are a few ways to take a hard look at spending, and they aren’t mutually exclusive. It may not be feasible or wise to try all at once.

One approach that has been used a lot is “vertical” – look at each department or agency. This was the approach in the cycle of “strategic reviews” by the early Harper government and the core of its 2012 “deficit reduction action plan.”

But across-the-board-savings targets land very unevenly. There are more than 300 federal entities. You can’t expect to generate the same dividend of savings across all of them. Some deliver the uncuttable programs identified by the questions above. Some carry large budgets that go out as transfers to people or businesses, or they run contribution programs that go out to a variety of recipients who will notice and resist any cuts.

Others spend almost all their budget on their salaries and running costs and have nowhere else to turn. There are bigger and smaller organizations with very different abilities to absorb reductions, especially to their workforce.

A serious weakness of vertical reviews is that you don’t get to look across multiple organizations and consolidate their services and programs, or get to reorganize the boundaries among departments and agencies. Vertical reviews don’t let you look closely at cost drivers that are common across the government where efficiencies and savings could potentially be reaped by new approaches or common service providers.

Some past reviews have looked at “clusters” of seemingly related organizations. For example, a cluster would be the security and intelligence agencies as a group; the ones that deliver Indigenous programs; the ones with significant international operations; and those that have a lot of science and research activities.

Operating costs

Because so many outward-facing programs are politically uncuttable, successive governments have returned to the operating costs of government and tried to dampen future growth or reap “efficiencies.” In the not-too-distant-past, there was a broad review of “administrative services;” of the overall compensation scheme; of how legal services are delivered within government; a review of government vehicle fleets; a review of how real property is managed; and one of how training is delivered.

Some people approach this part of spending – the government-to-government (“G-to-G”) services – from the premise that the best way to force innovation and improvement in the public sector is to starve it of resources and force the bureaucrats to adapt. Politicians of all stripes are quick to use simplistic language of overhead and cutting the fat, avoiding the real choices and potential consequences.

In reality, austerity is a poor way to drive innovation. You can achieve numerical savings targets, or you can improve the way government works, but one will have to take precedence over the other. The same people who like to admonish government to be more like the private sector are usually the most reluctant to see government adopt the best practices of the private sector of ongoing investment in its capital stock, its technology, or developing its workforce.

“G-to-G” services within the public sector make possible the delivery of all those externally facing programs and services. Starving these services has led to all sorts of issues – weak defences against cybersecurity attacks; toxic and crumbling buildings; mouldy archives and museum collections; rusted-out ships; breakdowns in financial controls; running key income support programs on 1980s’ computers and software; outdated equipment in government laboratories; deterioration of national parks; slow response at call centres; government workers falling behind on training to the latest standards; and a records management system that is chaotic and disorganized.

The current government recognized rust-out issues and over a series of budgets since 2016 has made important investments in federal laboratories, in upgrading correctional facilities and border infrastructure; as well as replacing core IT systems; cybersecurity; digitization of records; collaborative work platforms and training. The question now is whether this reinvestment will be sustained or will it be cut back again by whoever next forms government.

Past reviews always revealed a split between the big and small organizations. The bigger ones often take the view they would be better off fending for themselves and they often engage in various methods of resistance, egged on by vendors and consultants. The smaller ones have no choice but to comply.

The role of the federal government

Another way to look at the sources of spending is to start with more fundamental questions. Is this something the federal government should be funding at all? Is it better in the hands of provincial and municipal governments? Is it something that could be spun off out of government, set up to run on the revenue it generates, or be privatized or shut down altogether? There is some appeal in the mantra “the feds should focus on the things only the feds can do, and do well.” This was an important driver of the 1995 program review, which was fuelled intellectually by the New Public Management (NPM) theories gaining traction at the time.

This is immensely difficult to do in practice. There are legitimate and hard-fought differences of views about the role the federal government should play in the federation and about the role government should play in the economy and society. Any changes will be fiercely contested. The effects of cutting back the federal role may turn out to be temporary as eventually someone will campaign to reinstate the federal programs or activities.

Another approach to shrinking the federal government has been to look at its footprint and its assets. There has been more than one review of fixed assets looking for things to divest and several efforts to streamline service points. But attempts to divest federal assets or close federal facilities (civilian or military) are always resisted by local MPs and mayors, or by whoever is in opposition at the time. Ministers come under considerable caucus pressure to retreat, and they often succumb.

However, some outright privatizations of entire entities (Air Canada, Canadian Wheat Board, CN, federal airports, Ridley Terminals) and some outsourcings have been more successful and more enduring.

What’s next?

None of this is say that it isn’t important and necessary to take a hard look at federal spending and to debate the hard choices ahead. The next government clearly must tackle the fiscal balance sheet. Voters shouldn’t settle this time for lazy campaign rhetoric about vague notions of efficiency. Ask for some rigour and detail. Grill the candidates about what they see as cuttable and what is not.

To whomever wins the next election: Even if you don’t want to be fully transparent with voters, try to be clear in your own minds about what is on and off the table, and think hard about targets and timelines. Don’t dissipate energy and political capital on the small stuff. Go where the money is.

Subscribe to our newsletter.

Try a combination of approaches: vertical, cluster and horizontal cost drivers. Allow people to play with the machinery of government but don’t expect moving pieces around will magically generate savings. Remember the arithmetic – small changes in growth rates generate big numbers over time. Think through the change management and political strategies to overcome inevitable resistance and pushback. Whatever your view of the role of the federal government – big or small, and its role in the federation – make sure you set aside resources for recapitalization, reinvestment and continuous improvement of that role, or you will be sowing dragon’s teeth.

This article first appeared on Policy Options and is republished here under a Creative Commons license.