Here's a handy guideline to help you keep track of government austerity programs: Freeze spending for 10 years and you save roughly 3 per cent of your national gross domestic product. Using this formula, published last year in an International Monetary Fund position paper, a 10-year freeze by the federal government would cut Canada's "fiscal gap" by roughly $45-billion – enough, more or less, to balance the federal books. A further 10-year freeze would reduce the government's net debt, now 30 per cent of GDP, to 27 per cent. With this 20-year spending freeze, in other words, you would make a good start on fiscal prudence.
You can use this guideline for the provinces, too. A comparable 20-year freeze in Ontario would wipe out the province's $18-billion deficit and cut its net debt, now 35 per cent of provincial GDP, to 32 per cent – a good start.
Arbitrarily ignoring, for the moment, the other provinces, this kind of extraordinary federal-provincial restraint would reduce the country's net debt to 59 per cent of GDP – a single percentage point below the level recommended by IMF economists Carlo Cottarelli and Andrea Schaechter.
In real life, though, these calculations are strictly rhetorical: Neither the federal government nor any of the provincial governments would freeze spending for 20 years – or, for that matter, for a single year. Looking out only five years, Ottawa anticipates that its spending will rise by 17.7 per cent, not zero per cent, for an average annual increase of 3.5 per cent – a long way from a freeze.
The budget variable, of course, is the rate of economic growth that accompanies the spending freeze. The federal government anticipates its revenues will rise by 34 per cent in the next five years, an average annual increase of 7 per cent. Will revenues rise at twice the rate of spending? If so, however improbably, the government could eliminate the federal deficit, as Finance Minister Jim Flaherty has promised. But it would still not reduce the federal debt.
Thus Canada, federally and provincially, won't contribute much to the lowering of public debt in the Group of Seven. The IMF position paper notes, once again, that Canada is in a better fiscal position than its G7 peers: Germany, France, Italy, Britain, the United States and Japan. At the same time, Canada is a small part of the G7 – and its fortunes will be determined by the success or failure of the G7's more spendthrift partners, none of which has yet frozen spending for a single year.
Without spending restraint for the next decade, the IMF position paper says, the public debt of the G7 countries will spin out of control. Assuming that these countries continue to spend as they are now spending, G7 debt (as a percentage of GDP) will spiral from the current 85 per cent of GDP to 110 per cent in 2015; to 200 per cent in 2030; to 440 per cent in 2050.
The IMF economists suggest a reasonable objective would be to scale back the average G7 debt to 60 per cent of GDP. This objective would require cutbacks equal to 8 per cent of G7 GDP. Some countries would have a more difficult job than others. The Americans will need to find $1.5-trillion (U.S.), which is 11.5 per cent of GDP, to balance their budget – and still not pay down a dime of debt.
The IMF position paper makes an interesting comment on the fiscal crises that have humbled the G7 members, supposedly the most sophisticated of countries. Since 2008, the paper notes, public debate has concentrated on the current crises. What is more important now, it argues, is the way fiscal policy was managed before the crises.
Between 1965 and 1985, G7 governments undertook a huge expansion of social services. Canada took public spending from 20 per cent of GDP to 48 per cent – roughly the same level as profligate France and Italy. Besotted by the delusion that government spending could sustain never-ending economic expansion, the average G7 debt (as a percentage of GDP) rose to 85 per cent by 2010.
The IMF paper, incidentally, notes that G7 austerity must rely largely on spending cuts, not tax increases. In plain English, the message for the G7 is this: Put up your hands, all seven of you, and step back from the public purse.