Public Spending Will Become Squeezed

By Peter Lindfield, published in the Telegraph-Journal 28th August 2012

As the calendar moves closer to the next election in New Brunswick, it is clear that a central issue will be the government’s performance on the economy. There has been much hand-wringing over what the role of government should be in determining sustainable growth and prosperity. But there is widespread agreement that provincial government spending, as a share of the overall economy, needs to be reduced.

On the face of it, the challenge is simple enough. Recent government expenditure reductions and the elimination of various programs have contributed to a reduced fiscal deficit. But structural reasons will make it more difficult to easily reduce the size of government. Over time, preserving current government obligations will require substantial increases in the share of the provincial economy devoted to the public sector.

Demographic changes will greatly expand provincial financial outlays unless politicians make decisions to reduce the steadily escalating level of health care provision. In New Brunswick, almost 40 per cent of the provincial budget is dedicated to health care. Barring other adjustments, larger percentages of that budget will go to supporting those over 65 and the ratio of this age group to those of working age is rapidly rising. The share of the population over the next generation who will need extensive care is also increasing.

The rising fiscal debt and the eventual and inevitable return to higher interest rates will raise the share of provincial spending devoted to debt interest payments, which was pegged at $600 million for 2011. Until recently, government debt was a manageable portion of its expenditures but today, even if the fiscal deficit is reduced to zero, the cost of managing the debt will continue to rise. This will place a severe constraint on government expenditures.

Methods that have been used to inhibit the deficit, such as government pension liabilities and the deferred maintenance of provincial infrastructure, such as roads, bridges and water treatment systems eventually will be unsustainable. Pressure on provincial infrastructure budgets will increase in the years ahead.

The complexity and the cost of government services, such as scientific research and public safety have risen far more quickly than inflation. Over the last twenty years, the cost of post secondary education and health care has risen exponentially compared with the price of automobiles, clothing and electronics. The relatively lower prices of consumer goods reflect trends in technology, product innovation and the competitive forces of globalization. But if the New Brunswick government is to continue providing the same level of public services, government spending as a share of the economy is likely to increase rather than decline and inevitably will raise the cost of government’s involvement in the economy.

Technology and process improvement could substantially reduce government costs in some areas, but this obscures the fact that the largest components of the provincial budget involve cash or in-kind transfers. Long experience with government cost-reduction in Ottawa suggests that these components are much less responsive to productivity-enhancing methods than those that involve the production of goods or services. There is also scope for the elimination of outmoded or duplicate programs but efforts to identify outright government waste invariably will result in less than impressive savings.

Pressures on government spending are likely to rise rather than decline, despite good intentions and hard work. The profound challenges to conventional reductions in the size of government suggest that the overarching areas of public discussion needs to be about how much government transformation is possible without jeopardizing the economy, choosing priorities based on affordability and about what decisions we need to make to pay for those priorities.

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Filed under Government transformation, New Brunswick

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