Former Chief Statistician of Canada shows federal government 50% larger than traditional estimates, calls for greater transparency
Ottawa, February 6, 2014 - There are few more fundamental questions for policy makers than how big government is, and few that are more misunderstood. Much of government's impact is hidden, due to the increasing popularity of tax expenditures. Even when direct program spending declines, the growth in tax expenditures can more than make up the difference. What's more, there is a serious lack of accountability and transparency for the effects of tax expenditures, something that needs to change, according to a report released today by the Macdonald-Laurier Institute.
In the paper, titled Estimating the True Size of Government: Adjusting for Tax Expenditures, author Munir Sheikh attempts to improve on the traditional measure of government, which is direct expenditure as a portion of gross domestic product. Sheikh, former Chief Statistician of Canada, finds that the size of government adjusted for tax expenditures is around 50 percent higher for Canada's federal government, and around a quarter higher for all government, at about 54 percent of GDP rather than 44 percent of GDP. These estimates still understate the size of government since there is no information available on a significant portion of tax expenditures.
"This raises the question of whether or not governments should rely on tax expenditures to achieve their policy goals", writes Sheikh. With tax expenditures, government allows selected citizens to keep some of what they would have otherwise paid in taxes if they themselves use the money for things the government would have provided directly. While there are appropriate circumstances to use tax expenditures, Sheikh observes that problems include increased complexity to the tax system, misrepresenting the size and cost of government, ineffective reporting in the budget process, lack of accountability for tax dollars spent, and the relative ease by which governments can introduce them, leading to their inappropriate growth over time.
"The piling up of tax expenditures in a tax system that is already quite complex makes the system so complex as to be beyond the reach of many taxpayers", says Sheikh.
Sheikh identifies the following principles for future use of tax expenditures:
• First, all proposals for tax expenditures must be evaluated by whether or not they would pass the test if they were to be introduced as a direct expenditure program.
• Second, having passed such a test, a proposal would be considered for delivery as a tax expenditure only if it can be demonstrated that this mechanism would be administratively more efficient.
• Third, the proposed tax expenditure program must be costed.
• Fourth, all tax expenditures must be reported in the annual budget with their cost side by side with, and added to, direct expenditures at an appropriate time: estimating the cost of all tax expenditures is a large undertaking and a long-term objective.
"This requires a lot of work but, given the importance of knowing how large or small the government is, let this work begin", writes Sheikh.
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Munir A. Sheikh is an Executive Fellow at the School of Public Policy at the University of Calgary. He recently served as a co-Commissioner of Ontario's Social Assistance Review, which submitted its Report to the Government of Ontario on transforming the program in October 2012. He served the Government of Canada in many senior level positions including the Chief Statistician of Canada, Deputy Minister of Labour, Deputy Secretary to the Cabinet, Expenditure Review at the Privy Council Office, Associate Deputy Minister, first at Health Canada and then at Finance Canada, and Senior Assistant Deputy Minister, Tax Policy at Finance Canada.
The Macdonald-Laurier Institute is the only non-partisan, independent national public policy think tank in Ottawa focusing on the full range of issues that fall under the jurisdiction of the federal government.
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