The Benefits of Smaller Government
This is the original version of a speech I gave earlier this month at Carleton University, for the second edition of the Government Innovation Conference organized by the Municipal Taxpayer Advocacy Group. On the picture, I am with Ade Olumide, president of the MTAG. -- 24 December 2012
The Benefits of Smaller Government
3 December 2012, Ottawa
As a Member of Parliament for the Conservative Party, I am often described as a right-wing politician. According to conventional ideological divisions, this is what distinguishes conservative politicians from those of the Liberal Party, who are supposed to be in the centre. And from NDP or Bloc members, who are seen as left-wingers.
I have never really liked those distinctions, because I don’t believe they really tell us anything useful.
I prefer to use a more precise rule to define my position: when we are faced with a problem, should the government intervene or should we leave individuals to find a solution by working together? Should we have a bigger government with less liberty or a smaller government with more liberty?
My answer is we should have a smaller government with more liberty. Government should intervene less and every time it’s possible, we should defer to the free market and to individual initiative instead of imposing new rules.
I have respect and admiration for politicians considered to be right-wing, like Margaret Thatcher or Ronald Reagan. They managed to reduce government interventions in some areas.
But I also respect politicians considered to be left-wing who did the same. For example, Bill Clinton significantly reformed welfare programs, cut down spending and eliminated the budget deficit of the American government.
Still, I am a member of the Conservative party because it is part of conservative philosophy to understand the benefits of smaller government.
For us conservatives, government should ideally set up and enforce the basic rules of life in society. And then, leave individuals free to cooperate among themselves to provide for their wants. Government should not intervene to solve each and every problem on the road to a utopian and unrealistic vision of society.
To paraphrase John F. Kennedy from a conservative perspective: don’t ask what your government can do for you; ask your government to get out of the way, so that you can be free to take responsibility for yourself, for your family, and for everyone else that you care about.
Good government policy gives individuals the opportunity to dream and to realize their dreams; it does not impose the dreams of some on everyone. I went into politics to defend this kind of policy.
More specifically, if we look at the available data, what are the benefits of smaller government? I think the evidence is quite clear.
Most of you have probably heard about the Fraser Institute’s “Economic Freedom of the World” annual report. It looks at more than 20 components of economic freedom. Not only the size of government but also other components such as enforcement of property rights and freedom to trade.
Countries in the top quartile of economic freedom had an average per-capita GDP of $37,691 in 2010, compared to $5,188 for bottom quartile countries.
In the top quartile, the average income of the poorest 10% was $11,382, compared to $1,209 in the bottom. Think about this: the poorest 10% in the most economically free countries are twice as rich as the citizens in the least free countries. The poor also benefit from economic freedom.
There are still more benefits to living in an economically free country with a smaller government. Life expectancy is 79.5 years in the top quartile compared to 61.6 years in the bottom quartile, and political and civil liberties are considerably higher in economically free nations than in unfree nations.
Canada has improved in this ranking in recent years and is now in fifth position. The U.S., where government keeps growing, has dropped to 18.
Another recent study by a British think tank, the Centre for Policy Studies, has looked at the impact of the size of government on growth and other outcomes in developed economies.
The study found that for the period between 1965 and 2010, a higher tax to GDP ratio has a statistically significant, negative effect on growth. For example, an increase in the tax to GDP ratio of 10 percentage points is found to lower annual per capita GDP growth by 1.2 percentage points.
A similarly statistically significant negative effect on growth is found with a higher spending to GDP ratio. Between 2003 and 2012, real GDP growth was 3.1% a year for countries with a small government, compared to 2.0% for countries with a big government.
In this study, small government is defined as one where both government outlays and receipts are below 40% of GDP. I’m not sure I would qualify this as “small” government! But there would have been no countries in the category “below 10% of GDP”. About 10% of GDP: that’s how big government was in all rich Western countries like Canada a century ago. It just shows you how governments have grown and become gigantic in the 20th century.
THE LOGIC UNDERLYING SMALL GOVERNMENT
The logic underlying the benefits of small government is the following: governments can only spend what they have taken out of the real economy. A government cannot inject resources into the economy unless it has first extracted them from the private sector through taxes or put us further into debt by borrowing the money.
Every time the government takes an additional dollar in taxes out of someone’s pocket, that’s a dollar that this person will not be able to spend or invest. Government spending goes up, private spending goes down. There is no net effect, no increase in overall demand. No wealth creation.
Government borrowing has the same effect. The private lenders who lend money to the government will have less money to lend to other private business people. Or they will have less money to spend or invest elsewhere. Government borrowing and spending goes up, private borrowing and spending goes down. There is no net effect, no increase in overall demand. No wealth creation.
Government spending always competes with private sector spending for scarce resources. Moreover, bureaucracies use resources less efficiently than private businesses, which have to remain competitive to be profitable and survive. When you divert resources from the more productive uses that they can find in the private sector to less productive uses in the public sector, you will see less growth.
WHAT OUR GOVERNMENT HAS DONE
That is why to ensure we have a growing economy, we need to let entrepreneurs keep the means to create wealth. We need to create the best conditions possible for the private sector to become more productive.
This means first of all to restrain spending. In our Economic Action Plan 2012, we concluded a comprehensive review of approximately $75 billion of direct program spending by federal departments and agencies.
That review identified a number of ways to enhance the efficiency in the way we spend taxpayers’ dollars and achieved ongoing savings of $5.2 billion.
Government program spending is projected to steadily decline over the next four years as a proportion of our economy to return to pre-recession levels.
We also need to reduce taxes. Corporate taxes now stand at 15%, the lowest among G7 countries. They were at 22% when we took power six years ago. That’s a concrete way to leave resources in the hands of the private sector.
We need more free trade. That’s also smaller government. It means smaller tariffs, smaller quotas, less regulation, fewer obstacles, for businesses and consumers.
Our government has announced free trade agreements with nine countries. We are still negotiating with several other countries. We hope soon to be able to announce a very important agreement with the European Union.
We need less regulation on businesses. Unnecessary red tape is a hidden tax on entrepreneurs and weighs heaviest on those least able to bear it: small business owners. Unnecessary red tape stifles economic growth and job creation, reduces productivity and can crush the entrepreneurial spirit of Canadians. As minister for Small Business, this is one of my main preoccupations.
Last January, I unveiled the Report of the Commission to reduce Red Tape. It contained 105 recommendations to get rid of regulatory irritants and to prevent red tape from growing again. Several have already been implemented. That’s a concrete way to free the private sector.
Finally, if government is really going to get smaller, that means it needs fewer people to manage it. The Economic Action Plan 2012 stated that, in total, federal employment would be reduced by about 19,200 positions over a three-year-period.
The federal public service has stopped growing after considerable growth since 1999. Between March 31, 2010 and March 31, 2012, the population of the federal public service decreased by 4,863 employees (from 282,955 to 278,092). In proportion to the Canadian population, the size of the federal public service has decreased from 1 percent in 1983 to 0.82 percent in 2011.
WE NEED TO DO MORE
I think this should only be a beginning. We need to do more, a lot more, to streamline government.
A bigger government means a government that taxes more, spends more, gets deeper into debt, and regulates more. It’s a government which intervenes in all aspects of our lives, all the while curtailing our freedom to act.
You can barely do anything nowadays without having to ask a bureaucrat for some permission. You want to row a rowboat? Better be patient while you try to obtain all the necessary authorisations and learn all the rules that apply. Although there may be thousands of pages of obscure regulation or anything and everything, you won’t be able to claim that you did not know them before a judge if you are caught violating one of them. Ignorance of the law is no defence.
Governments too often treat us like irresponsible children and act as if they know better than we do what is good for us. From their perspective, this justifies all the measures they adopt to hold our hands, from the cradle to the grave and tell us what to do. And also to pick our pockets.
Governments are trying to control everything we do to protect us from all the imaginable dangers and risks of life. But who will protect us against governments?
I believe we are at the end of a cycle of government growth that began a century ago. The current crisis has shown that more government spending is not a solution. Government spending doesn’t create wealth. By taxing or borrowing government takes resources from some and give them to others.
It is like taking a bucket of water in the deep end of a swimming pool and emptying it in the shallow end. More government spending will act as an economic sedative rather than an economic stimulus.
We have to become not only better managers of government; we have to become better managers of a smaller government.
We need to rediscover the beauty of a smaller government with more freedom and responsible citizens. That is what made Canada a great country, what made us free and prosperous in the first place.