Taxing and spending


in Economics, Politics

One persistent problem in politics everywhere is that politicians know that spending equals votes, while tax increases tend to cost them. There is always a pressure to spend unsustainably and then leave the bill for somebody else to deal with. Some people have even called this a strategy for shrinking governments they believe to be too large by ‘starving the beast’ with spending that exceeds tax revenues.

There is a case to be made for deficit spending in times of deep financial uncertainty. Government spending can reduce the suffering associated with job losses and help to maintain confidence in the economic system. That, in turn, can reduce the force of feedback effects where lack of confidence in the financial system produces weakness which then further reduces confidence.

In the long term, though, government revenues and expenditures must be balanced. Given the fondness of politicians for spending, their aversion to raising taxes, and the ever-present appeal of passing on the difficult choices to others, there ought to be political and legal mechanisms in place to encourage that an adequate array of government services are provided and that they are funded in a sustainable way through taxation. Perhaps one way to curb the tendency to spend now and ignore the cost would be the creation of more automatic mechanisms to raise taxes in the face of persistent deficits. If you have gotten beyond the period where Keynesian deficit financing is justified by economic weakness, the onus should be on government to either fund new initiatives through existing funds or raise taxes promptly to cover them. Governments that are aware that their spending projects could generate future tax increases may be a bit more disciplined in deciding where dollars out to be directed (not at local hockey arenas, perhaps?).

There is nothing wrong with obligating people to pay taxes to provide necessary services, including assistance to the least advantaged members of society. In addition, there are many circumstances where taxation-funded government services are the most efficient way to provide something. Canada’s single-payer health care system, for instance, produces demonstrably better outcomes than the semi-private system in the United States, and does so at a lesser cost. This is partly because health care is an industry rife with market failure, where the profit-maximizing behaviour of private firms does not serve the general good of the populace, in the absence of substantial regulation.

Of course, tax dollars can also be spent in inefficient or corrupt ways. There is no simple single mechanism that can ensure good economic and social policies. Rather, maintaining world class standards in governance requires the effective operation of a whole collection of institutions, acting in concert. These include federal and provincial legislatures, the courts, and the bureaucracy. Legislatures may have the most legitimacy, on the basis of their electoral mandate, but they also have the most short-term perspective. Their sneakier and more spendthrift tendencies must be curbed by oversight from elsewhere.

{ 12 comments… read them below or add one }

Anon February 25, 2011 at 1:52 pm

In terms of oversight, don’t forget agents of Parliament like the Auditor General and Parliamentary Budget Officer.

. February 26, 2011 at 6:30 pm

We’ve also observed the inability of the United States to govern itself properly, in the sense of paying its bills and balancing obligations and revenues. Already the world’s largest borrower by far, the U.S. political system seems ready to borrow trillions of additional dollars, presumably on the assumption that the world will continue to lend it ever-increasing sums at rock-bottom rates with no impact on its credit rating.

But what would happen if a major ratings agency downgraded U.S. debt, or a big lender began to diversify away from U.S. debt, or the U.S. dollar plunged? This is a country accustomed to making the rules, then breaking them with impunity. But what happens if that impunity is removed, and the very forces of globalization that the Americans have trumpeted turn against the chief trumpeter.

In this circumstance, Canada could get sucked down by the world’s panicky reaction to U.S. mismanagement, in which case little would cushion our economy. Or Canada could be seen as a comparatively safe haven, with upward buying pressure on the Canadian dollar pushing it to levels beyond anything in our lifetimes.

With so much uncertainty, the best option for Canada is to get deficits down much faster than federal and provincial governments are now intending, refocus as much spending as possible on improving competitiveness rather than politically attractive subsidies and useless tax expenditures, and diversifying our economy like mad outside North America. The resulting life jacket would be thin, but it might provide a little insurance against the storms ahead.

. March 11, 2011 at 12:02 am

The total cost of the Conservative government’s plan to purchase 65 F-35 fighter jets over 30 years is close to $29.3 billion — billions more than previously estimated, according to Parliament’s budget watchdog.

The pricetag includes both the purchase price and long-term sustainment costs for the jets. “Total ownership” of the program had previously been estimated at $16 to $18 billion.

Parliamentary budget officer Kevin Page, who has cast doubt before on the government’s accounting practices, was asked by the Liberal Opposition to look at the F-35 deal with U.S. defence giant Lockheed Martin.

Previous reports by Page have questioned the government’s deficit projections and its plan to cut the size and cost of the federal bureaucracy.

Thursday’s report again puts him at odds with the Conservatives and gives weight to opposition party arguments that the purchase of the jets would cost more than the government has been saying.

To arrive at his estimate of $29.3 billion, Page said he used a “top-down” model that considered historical trends on the cost of aircraft and key cost drivers. Page estimates the acquisition cost for the fleet at $9.7 billion and the ongoing sustainment cost for it at $19.6 billion. The sustainment cost breaks down as follows:

initial logistics set-up cost: $1.7 billion;
operating and support cost: $14 billion;
overhaul and upgrade cost: $3.9 billion.

Page cautions that any cost estimates, his own or those from other sources, should be viewed in the context of the methodology used and data available. He said he asked the department of national defence for clarification on the methodology it has used to arrive at its estimates.

. March 12, 2011 at 3:44 pm

Let’s indulge Mr Obama in his fantasy economics: imagine that he does reduce the deficit to 3.1%. Supposedly, that would stabilise government debt: but it would do so at a dangerously high level of around 80% of GDP, and as interest rates rise the target will become much harder to hit. And that is before you consider the biggest problem of all: as more and more baby-boomers retire (the first started to do so this year), their demands for pensions and government-provided health care will start to push the deficit sharply up again after that.

Indeed, the real problem with both Mr Obama’s budget and the Republicans’ proposals is not so much the half-truths and fibs within them, as all the things they both left out. America needs to simplify its tax system and (slightly) increase its overall tax take. It needs to rein in its defence spending, which is currently equivalent to that of the next 20 countries combined. And it needs to tackle the gathering surge in entitlement costs. All these recommendations were made by the deficit-reduction commission that Mr Obama himself set up, but his budget conspicuously fails to take up any of them. Other debt-burdened Western countries have embarked on a stringent diet. America continues to gorge.

. April 28, 2011 at 2:04 pm

Mr. Harper has governed on keeping taxes low – and lowering them where possible. His major tools have been cutting the GST, introducing a thicket of targeted tax credits and raising the basic income limit for paying tax. These have been worth billions of dollars, and both the Liberals and NDP would keep them all. Both parties want to roll back corporate tax cuts and, in the NDP’s case, raise levels. So on corporate tax cuts, the parties do differ. But on the much larger sources of revenue – personal and consumption taxes – the parties are at one with Mr. Harper.
So nervous are the opposition parties of being labelled “tax and spenders,” they don’t even propose increased taxes on the wealthy. Nor do they propose to scrap the benefit programs Mr. Harper introduced, such as the child benefit payment that’s his feeble answer for child care, or new institutions and programs that have proliferated under the free-spending Conservatives.
Rather than paying for some of their own proposals by eliminating these Conservative initiatives, the opposition parties are building on top of them. Presumably, they calculate that the Conservative initiatives are now seen as an “entitlement” by those receiving them and, such, are politically risky to remove.

. May 12, 2011 at 11:15 pm

With the election results barely a week old, Conservatives are muddying the waters around a central – and surprising – campaign pledge.

The revised 2011 budget that the government will present next month will not show a surplus by 2014-15 as promised in black and white in the Conservative campaign platform, even though the government insists it still intends to deliver on the election promise.

Finance Minister Jim Flaherty says he needs time to consult economists and to draft a clear plan to deliver the extra savings Prime Minister Harper promised during the election campaign.

“We will do the strategic and operating review and we will book [those savings] once the review is done. That will get us to balance a year earlier, but is not part of the upcoming budget,” Chisholm Pothier, Mr. Flaherty’s spokesperson, said on Wednesday.

. May 18, 2011 at 7:51 pm

Her thrice yearly reports exposed government waste and malfeasance. Her audit of privacy commissioner George Radwanski and his staff revealed “abuse of public funds … for their personal benefit.” She determined that the long-gun registry cost more than a billion dollars to set up and maintain, 500 times more than the $2-million price tag claimed by the Liberal government. Later, Fraser examined preparedness for a terrorist attack and the living standards on native reserves, and found both wanting.

She will indelibly be connected to the 2003 Annual Report released in February 2004, in which she exposed the sponsorship scandal. She said in judgmental lan-guage not typically used by auditors, there was “little evidence of value received for the money spent.” Her report said the sponsorship program was run “in a way that showed little regard for Parliament, the Financial Administration Act, contracting rules and regulations, transparency, and value for money.” Fraser said the “non-compliance … was not the result of isolated errors” but “how the government ran the program.”

Indeed, Fraser’s real legacy is the move away from observations couched in the boring language of audits to criticism written in plain language with blunt descriptions of the misuse of money. Fraser has said, “Some say the auditor general should just deliver the facts and be totally devoid of any personal interpretation. I don’t want to do my job that way.”

. July 30, 2011 at 12:10 pm

To non-partisans, the idea of taming the deficit by spending cuts alone flies against both common sense and arithmetic. America’s tax-take is not high either by international or its own historical standards. One commission after another has advocated mixing spending reductions and revenue increases. Without the latter, entitlement programmes will have to be eviscerated, even if, as now looks possible, the defence budget takes a share of the pain. But the Republicans will not budge from their dogma.

Where does this intransigence spring from? Part may be tactical. If a default is really possible, won’t the man in the Oval Office have to blink first—and isn’t it just irresistible to inflict this humiliation on him? Part is pandering: a Gallup poll in May found that 70% of Republican voters do not want Congress to raise the debt ceiling at all—and almost every Republican in Congress has signed the “pledge” of Grover Norquist’s ferocious advocacy group, Americans for Tax Reform, to oppose all tax increases.

. August 3, 2011 at 8:36 pm

How the Billionaires Broke the System
August 1, 2011

The US deficit reduction plan makes no sense – until you remember who’s behind the Tea Party movement.

By George Monbiot. Published in the Guardian 1st August 2011

There are two ways of cutting a deficit: raising taxes or reducing spending. Raising taxes means taking money from the rich. Cutting spending means taking money from the poor. Not in all cases of course: some taxation is regressive; some state spending takes money from ordinary citizens and gives it to banks, arms companies, oil barons and farmers. But in most cases the state transfers wealth from rich to poor, while tax cuts shift it from poor to rich.

So the rich, in a nominal democracy, have a struggle on their hands. Somehow they must persuade the other 99% to vote against their own interests: to shrink the state, supporting spending cuts rather than tax rises. In the US they appear to be succeeding.

. August 5, 2011 at 3:24 pm

The sticking-point is not on the spending side. It is because the vast majority of Republicans, driven on by the wilder-eyed members of their party and the cacophony of conservative media, are clinging to the position that not a single cent of deficit reduction must come from a higher tax take. This is economically illiterate and disgracefully cynical.

. June 2, 2012 at 6:44 pm

It might or might not make much difference to the quality of the air Canadians breathe, but the disbanding of a team of scientists that monitors air pollution raises troubling doubts about the federal government’s priorities, and with whom its interests lie.

It took an investigation by Postmedia News and the leak of a series of documents to reveal that as part of its budget trimming through public-service cuts, the government plans to break up a team of Environment Canada smokestack specialists. These have hitherto worked closely with industry and enforcement officers to crack down on toxic pollution that kills thousands of Canadians each year.

The Ottawa-based group of seven specialists has been told that its current role is to be eliminated over the coming year. That role has consisted of travelling the country to measure emissions and analyze data so as to advise industries on emission reduction or, failing persuasion, provide evidence for enforcement officers to lay charges against excess polluters.

In past years, the team’s research has been used in the development of pollution standards, the assessment of pollution sources and the measurement of pollution-reduction technologies. The team would monitor pollution sources, including cancer-causing emissions from installations such as hospital incinerators, crematoriums, boilers, smelting furnaces, landfills and coal-fired power-generating stations.

While the federal Environment Department maintains that the disbanding of the team will not affect its ability to conduct research into and monitoring of pollution, independent experts beg to differ. They maintain that the cuts to the program jeopardize effective pollution monitoring in general, and specific-ally an initiative to create a neutral, science-based monitoring plan for the Alberta oil-sands. In the process, it is suggested, Canada’s already tarnished environmental reputation will be further besmirched.

More serious than the threat to Canada’s reputation by reducing the capacity for pollution monitoring is the potential threat to Canadians’ health and life expectancy.

. August 24, 2012 at 3:15 pm

Mad? Or just bad?

SIR – Lexington asked “Are the Republicans mad?” (April 28th) for pursuing a rightist agenda, and answered his question with an admirable attempt at even-handedness. What indeed “gives a couple of think-tankers the right to specify where the political centre is?” Well, nothing really. But one thing we can objectively assess is the likely effect of the Republican Party’s policies if put into action: a government that does not invest in education, or roads, does nothing to prevent monopolies, protect the environment, ensure minorities’ civil rights, or assist the poor and elderly with health care.

I teach a course on failed states, and the logical consequences of the right’s vision resemble Russia in the early 1990s or much of sub-Saharan Africa today. Grover Norquist might fare well in this world, but for those who value the virtues of a modern democratic society, the think-tankers are right to challenge the fiction of the “freedom-trampling” federal government.

Scott Radnitz
Assistant professor of international studies
University of Washington

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