Canadian Public Policy

Tax, Borrow and Spend: Financing Federal Spending in Canada, 1867-1990 by W. IrwinGillespieReview by: Les MacDonaldCanadian Public Policy / Analyse de Politiques, Vol. 18, No. 3 (Sep., 1992), pp. 354-355Published by: University of Toronto Press on behalf of Canadian Public PolicyStable URL: http://www.jstor.org/stable/3551818 .

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Policy Analysis and Economics: Developments, Tensions, Prospects edited by David L. Weimer. Boston, Kluwer Academic Publishers, 1991. Pp.xviii,213. $59.95US.

This collection of nine articles by American public policy professors highlights the problems that have accompanied the evolu- tion of economics in the postwar period. The authors argue that the instruction and practice of economics has become increas- ingly mathematical and theoretical as economists have tried to develop a positive science. As a result, economics has less and less to say about 'normative' public policy issues.

Major gaps in the economic paradigm make it difficult to apply economics to policy issues. First, the 'elegant' theories and analytical techniques used by graduate economists are often too time-consuming and esoteric to provide clear, timely advice to policy-makers. Perhaps more damning, many analytical procedures are too sophis- ticated for the available data. Second, economic analyses exclude critical factors that underlie policy development: institu- tions, in particular, are almost completely ignored, even though policy options are al- most always dependent on the processes that are available. Moreover, economic ana- lyses usually exclude key actors and critical intangible values that proscribe the pos- sible options.

The various authors debate and confirm these concerns both from a general perspec- tive and through detailed examinations of welfare theory, utility theory, uncertainty and insurance, industrial organization, macroeconomic policy and trade policy.

The purpose of this collection, however, is not to bury economics, but to elevate it to a new role. The book harks back to Ben- tham and the beginnings of classical eco- nomics, when the positive parts of econom- ics were directed to resolving normative public issues. The contributors call for a re- orientation of economics to support public policy development. To do this, economists

will need wider skills: in addition to their analytical abilities, they will require under- standing of historical, political, moral, legal, philosophical and organizational per- spectives. In a way, it will require a return to a liberal arts training and a reversal from the trend to specialization that has marked university training in recent decades.

PETER W.B. PHILLIPS, Policy and Research Branch, Saskatchewan Economic Diversification and Trade

Tax, Borrow and Spend: Financing Federal Spending in Canada, 1867-1990 by W. Irwin Gillespie. Ottawa, Carleton University Press, 1991. Pp.xvii,347. $24.95.

This is an ambitious work, theoretically and empirically. The author uses his own database of historical revenue figures and parliamentary budget debates to set the en- tire history of Canadian federal tax policy since Confederation within a comprehen- sive positive theory.

Gillespie's model is a variant of the clas- sical economic theory of competitive firms and utility-maximizing consumers. Sur- vival in a competitive political market causes governments to select a set of taxes (supplemented if necessary by borrowing) to satisfy taxpayers hungry for public goods who are likely to oppose any tax falling on them rather than their neighbour. As exter- nal factors affect the political cost curves of the components of the existing tax struc- ture, governments respond by changing the mix of taxes and the balance between tax- ing and borrowing until total cost is min- imized. Out of this dynamic Gillespie develops a list of 13 hypotheses to explain, predict or guide the behaviour of the mod- ern-day fiscal Prince.

What emerges are the recurring regu- larities: the primordial and periodic return to deficit financing, the concern for the national credit rating, the ever-present need to take account of horizontal tax com- petition from the United States, the impor-

354 Reviews/Comptes rendus

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tance of 'equitable' taxes (especially but not exclusively during wartime), and the ex- chequer-saving role of consumption taxes during depression. Finally, his analysis of the tax reform era of the past 25 years points to the conclusion that the reformers were more successful than previous an- alysts would allow.

While Gillespie's conclusions are frequently original and thought-provoking, his treatment of specific tax initiatives sometimes appears to offer more a shift in terminology than an advance in under- standing. It is not clear how an explanation of wartime introduction of taxes on excess profits due to '... the emergence of a new re- venue source with low political costs ...' (p.141) is more informative than earlier ac- counts of public and government 'indigna- tion at profiteering' (p.142). Political costs may not be readily gauged, and it is not al- ways clear which of Gillespie's maxims is most applicable. Why do governments sometimes choose incorrectly, as in the case of the failed 1934 attempt to tax windfall profits in gold production? (pp.175-176). Why is opposition more effective in some cases than others?

One challenge Gillespie anticipates, but perhaps dismisses too readily, is that politi- cians could use propaganda to manipulate the political cost curves (pp.246-7). If poli- ticians largely do take a passive, responsive role to voter preferences then changes in public opinion during election campaigns would be less significant than they appear.

Gillespie notes throughout his book that, in contrast to the prescriptive tone of most analysts of tax policy, his is a positive model of taxing behaviour. The only normative statements, bracketing the introduction and conclusion of the study, appear to give the informed citizen more scope for policy creativity than the Minister of Finance: the author's hope is that a better under- standing of the process of taxation will 'aid us as citizens to shape and mould our governments' (p.3) as 'part of our search for the good society' (p.252).

Perhaps Gillespie has given us some

grounds for hope in that his analytical tour of Canadian fiscal history succeeds in making us look at the old landmarks in a new light.

LES MACDONALD, Social Sciences and Humanities Research Council of Canada

The Economic Consequences of Quebec Sovereignty by Patrick Grady. Vancouver, The Fraser Institute, 1991. Pp.xvi, 168. Parting as Friends: The Economic Consequences for Quebec by John McCallum and Chris Green with Mario Polese, Pierre Fortin, Francois Vail- lancourt, Pierre-Paul Proulx and Rene Si- mard. The Canada Round: A Series on the Economics of the Breakup of Confedera- tion, No.5. Toronto, C.D. Howe Institute, 1991. Pp. xii,114. $9.95.

The pending deadline for the Quebec refer- endum has heightened debate over the economic viability of an independent Que- bec. The Economic Consequences of Quebec Sovereignty by Patrick Grady, and Parting as Friends by John McCallum and Chris Green, which is part of the C.D. Howe In- stitute series on the economics of the breakup of Confederation, contribute to that debate by correcting what the authors identify as a tendency by separatists to un- derestimate the economic costs of separa- tion to Quebec. The authors view this tendency as dangerous because it may re- duce the willingness of the Quebec and other governments to compromise in the current constitutional negotiations.

Both studies conclude that an inde- pendent Quebec would be economically vi- able but that the long- and short-term costs to Quebec would be substantial and much higher than the costs to the rest of Canada. Grady emphasizes that in Quebec 'eco- nomic policies required to ensure viability will require some very difficult structural adjustments and some unpopular policy-in- duced reductions in real income' (p.141).

Reviews/Comptes rendus 355

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