John Ivison: Carney will have to cut the uncuttable — if he has the guts

Yahoo

2 days ago

Budgets in government tend to creep like mould, not ebb like the tide.
Take the example of Indigenous occupational skills training. The Department of Employment and Social Development spends hundreds of millions of dollars a year funding Indigenous third parties who deliver the training. In 2017, the department was hauled over the coals by the auditor general because it did not collect data on performance indicators to demonstrate whether it was getting Indigenous people into stable employment.
At a parliamentary committee, the deputy minister said attempts to reform the system had been resisted by Indigenous partners because any adjustment would see them lose funding, and the Liberal government was reluctant to risk the political fall-out from erstwhile allies.
Consequently, the only solution was to allocate $100 million in new funding in the 2018 budget. 'In my experience, that is what it takes to get movement,' the deputy minister admitted.
This trip down misery lane is illustrative of how difficult it is going to be for the Carney government to enact the program savings that the finance minister last week asked all cabinet ministers to identify.
It is particularly apt because there are so many areas of program spending that have already been ringfenced as 'uncuttable' that Indigenous grants and contributions are likely to have a very large target painted on them.
In the last year of Stephen Harper's Conservative government, the then Department of Indian and Northern Affairs was allocated $8 billion in the Main Estimates. This year the combined allocation for the departments of Indigenous Services and Crown-Indigenous Relations is $38 billion, more than the department of National Defence (and that doesn't include the $400 million for skills training administered by ESDC, or the billions being invested in the Indigenous housing strategy by the Canada Mortgage and Housing Corporation).
This is not to suggest the money is being misspent: there were many years of underfunding in areas like First Nations education. But when the government says it is going to try to save more than $150 billion in spending over the course of three years — and rules out reducing transfers to people or provinces, or on defence and security spending — there are only so many options left.
'I see storm clouds ahead on the Indigenous front,' said Michael Wernick, the Jarislowsky Chair in public sector management at the University of Ottawa, and a former clerk of the Privy Council.
Spending down political capital with Indigenous groups and environmentalists might seem unlikely, but the government is already doing that with C-5, the recently passed major projects bill. Prime Minister Mark Carney is meeting First Nations leaders at a summit on Thursday and he will likely be lobbied heavily to move many of those grants and contributions from the 'cuttable' column into the 'uncuttable' one.
In a Policy Options article Wernick wrote in 2021, and reposted this week, he said governments serious about program reviews have to 'go where the money is'; accept that any changes will be fiercely contested; and ask fundamental questions about whether certain activities should be funded at all.
Wernick said in an interview with National Post this week that Carney's efforts at spending restraint will not be a 'one and done' exercise, but will more likely resemble then finance minister Paul Martin's multi-year efforts in the 1995 and 1996 budgets that brought runaway deficits under control.
François-Philippe Champagne, the finance minister, indicated just such an approach in his letter to ministers that called on them to find savings of 7.5 per cent in the current year, 10 per cent next and 15 per cent in 2028–29.
This goes far beyond the productivity efficiencies that were included in the Liberal election platform.
But the need for more ambitious savings is apparent.
Recent projections by the C.D. Howe Institute and by economist Trevor Tombe suggest the commitment to increase military spending to five per cent of GDP is likely to push deficits and debt to levels not seen outside the pandemic. Tombe's model sees annual deficits of over $150 billion by 2035.
Wernick said the uncertainty surrounding the trade war with the U.S. means that fiscal forecasts are inherently unreliable. But he concedes 'the arithmetic is relentless' and has even proposed a specific defence and security tax that would see the GST increased by two points and the funds allocated directly to military spending.
The public is onside with more expenditure on defence. A recent Abacus Data poll suggested two-thirds of Canadians back the Carney government's announcements of more military spending.
But consumption-tax hikes in the current political climate are likely to prove as popular as taking a hatchet to Old Age Security payments.
Carney risks becoming the man who fell to earth if these cuts are miscalculated.
The prime minister does have a mandate to act, particularly if President Donald Trump follows through with his tariff threats.
A similar sense of crisis gave Martin leeway he might not have had in less straitened circumstances.
Over the course of three years, he reduced government spending by 19 per cent and reduced the federal headcount by 50,000 people. The budget was balanced within three years, the government's popularity rarely dipped below 50 per cent and the Liberals won the 1997 election.
The public accepted the need for action and sensed the Liberals would enjoy cutting spending far less than the opposition Reform party would.
The same logic applies for Carney.
But in the mid-1990s, the government of prime minister Jean Chrétien was able to demonstrate progress each year in the form of reduced deficits.
It is less clear how Carney will be able to claim victory. He has said the answer is faster growth and a balanced operating budget within three years.
Yet, growth will be hard to achieve if trade with the United States falls (it has dropped for four consecutive months this year), while GDP growth will result in increases to defence spending and fiscal transfers, which are linked to the size of the economy.
In addition, the definition of what constitutes 'operating,' as opposed to 'capital' spending (which Carney has tried to distinguish) is likely to muddy the picture.
Voters likely don't need to see balanced budgets, if the Carney government can demonstrate it is making progress on its other priorities, such as using the public balance sheet to bring in investment for major projects, and, crucially, is able to convey that the public finances are under control.
One way to do that would be to shrink the public service.
A new report from the Parliamentary Budget Office shows that the federal public service increased by 30 per cent between 2015–16 and the last fiscal year. It has topped out at 445,000 full-time equivalent positions, with a slight reduction expected over the next few years due to attrition.
Carney could chop a similar number that Martin did and still be left with a federal bureaucracy bigger than it was before the pandemic.
The problem for the government is not that bending the curve on program spending will lead to a rusting, hollowed-out public sector. Program spending reached 16 per cent of GDP in the last fiscal year, compared to 13 per cent in 2014–15 ($480 billion versus $329 billion in 2025 dollars).
The problem is that in the surreal economic milieu of Ottawa, the government and its provincial and Indigenous partners believe the only way to achieve lasting reform is to spend more money.
It will take a skilful, determined and politically secure prime minister to change that mindset.
[e-mail]
Twitter.com/IvisonJ
NP View: Mark Carney needs a chainsaw, not a scalpel
Poilievre says Carney lied about conflicts after ethics disclosure reveals investment portfolio