By Philip Hochstein

Governments throughout much of the world are finding themselves caught in a tight fiscal vice. Clamping down on one side is a need for often dramatically elevated spending on stimulus and bailouts, and on the other side the reduction in taxation and other revenue streams that inevitably comes with a downturn.

It’s a challenging scenario for those tasked with managing the public purse. Here in BC we’re already seeing a parade of headlines as tough decisions get made as to what government can and cannot afford to do going forward. And many more are to come.

Difficult and contentious though this process will be, these circumstances do present an opportunity to fundamentally re-consider what size of government will best promote long-term prosperity and well-being. For too long, “bigger is better” has been the common default view on this question.

Close observers of BC politics might wonder whether we didn’t already go through such an exercise with the “core services review” conducted early in the Liberal’s first term.

But vital through that process was, in reining in the run-away spending of the previous decade, the facts don’t bear up the common perception that government actually shrank. And good economic times through most of the current decade have shielded governments from a need to more rigorously assess the optimal size of their operations.

Total provincial government expenditures on a per capita basis have in fact trended upward in BC during the current decade, and at $8,050 in 2006 (the most recent year for which figures are available), were 15 per cent higher than $6,970 in 2000.

And, like all provincial governments and the federal government, BC has increased recent program spending by a larger amount than is justified by population growth and inflation.

Beyond the immediate imperative of reversing such trends, in order to reduce deficit pressures during a global recession, there are a variety of reasons to believe that a sustained focus on reducing the size of government will result in net benefits for society.

Extensive multi-jurisdiction research strongly supports the conclusion of a diminishing return on government spending beyond some per cent of total GDP, and a positive relationship between smaller government and economic growth. Smaller government has also been found to correlate with outcomes such as innovation (patents registered), lower unemployment, and higher per capita income.

Smaller government creates room for lower taxation, and therefore fewer of the disincentives and economic distortions inherent in even the best-designed tax regime. Lower marginal tax rates are a particularly important driver of investment decisions.

For Canada as a whole, and according to the most recent comparisons available (for 2006), total tax revenue amounted to one-third of GDP. That’s just slightly below the average for OECD countries of 36 per cent, and such mid-pack performance indicates considerable room for improvement.

Publicly delivered services in Canada also come at a high premium, by virtue of the compensation public sector workers now command. An analysis of the most recent census data by the Canadian Federation of Independent Business found that public sector employees get a wage premium of eight to 17 per cent – with the differential exceeding 30 per cent when non-wage benefits and shorter work weeks are factored in.

Furthermore, less service delivery by the public sector doesn’t necessarily mean services don’t get delivered. There are various successful models through which private-sector efficiencies, innovation and technological capacities are being harnessed to execute what were once bureaucratic functions.

Indications are that the BC government is now prepared to take a very hard and comprehensive look at its operations and spending, and to transition both to more sustainable levels. A leaner public sector and different delivery models may emerge.

If so, the prosperity-enhancing benefits would be very significant. It’s unfortunate that it took a global recession to bring us to a point where this may become achievable – it would have been an easier exercise in better times. But political realities are what they are, and it would be a tremendously large lost opportunity if we don’t act now.

Philip Hochstein is President of the Independent Contractors and Businesses Association, an organization which represents independent, family-owned construction companies in British Columbia.