By Alex Whalen
and Steve Globerman
The Fraser Institute
The COVID-19 outbreak and economic downturn have produced a dramatic increase in government spending across the country.
The federal and provincial governments have rolled out a variety of programs aimed to support businesses and individuals through these tumultuous times, in addition to extra public health-related expenses.
However, research reveals that even before COVID-19, government spending was growing in Atlantic Canada at a rate that should concern residents.
Our recent study measured government’s growing share of the economy of Atlantic Canada.
Consider Nova Scotia. Accounting for all government spending in the province (federal, provincial and municipal), government accounted for 61.6 percent of all economic activity in Nova Scotia in 2018. This figure is almost four percentage points higher than in the next closest province (Prince Edward Island) and more than double the figure in Alberta (29.3 percent).
Further, the share of the economy represented by government spending in Nova Scotia, while historically high, has been growing. In 2007, the first year examined, total government spending as a share of the provincial economy was 56.9 percent, increasing by almost five percentage points in just over a decade.
Of course, spending is only one measure of the size of government and doesn’t take into account regulation and other government interventions. Governments leave a very large economic footprint in the province.
So why should Nova Scotians care about the size of government?
For starters, the relative size of government in the province significantly exceeds estimates of what’s considered an optimal size for maximizing real economic growth. One study of Organization for Economic Co-operation and Development (OECD) countries covering the early-2000s found that the amount of government spending (at all levels) that maximized economic growth was around 26 percent of the economy, after which the rate of growth declined consistently.
Why should government spending have such an effect?
What we observe internationally is that many countries have insufficient government, meaning that basic functions of government are absent, such as independent courts, effective policing and basic universal education. The absence of such services impedes economic growth and social progress.
When governments provide these necessary services, even if government spending as a share of the economy increases, so too does economic and social progress.
However, going beyond optimal levels usually entails government becoming active in areas where its presence is harmful to economic growth. For instance, governments increasingly focus on redistributing income from certain groups to others, rather than providing incentives for economic growth, and begin favouring certain industries and sectors of the economy through corporate welfare and protectionism, which harms productivity and economic growth.
To be sure, governments have other legitimate priorities besides maximizing real economic growth. However, economic growth is certainly an important priority given the linkages between a growing economy, higher living standards and greater overall prosperity. Moreover, economic growth generates tax revenues that finance government’s social programs.
Growth in the size of government is accompanied by deficit-spending and increasing debt. Increased debt today means higher taxes tomorrow. With Nova Scotia already being a relatively high-tax jurisdiction in North America by many measures, additional tax increases will further harm the competitiveness of domestic businesses and discourage investment.
These data on the size of government provide important context for the COVID-19 economic recovery. The data reveal Nova Scotia to be the most government-dominated province in the country, measured as a share of the economy.
With escalating spending and a shrinking private sector due to the pandemic, Nova Scotia’s large government should be of growing concern.
History and experience tell us that large government will impede rather than foster economic growth and prosperity.
Alex Whalen is an analyst and Steve Globerman is a senior fellow at the Fraser Institute.