Advice for a new finance minister
TheGlobeandMail.com – Globe Debate/Editorials
Mar. 21 2014. Editorial
Finance is the most important ministry in the federal government. Its business touches on every other ministry, and its fingerprints are all over every minister’s policies. It’s true that a minister of finance doesn’t have anything close to a free hand, especially in a centralizing administration like the Harper government. But the policies that come out of Finance – whether they originated there or in the Prime Minister’s Office – determine the bulk of a government’s agenda. Things don’t happen until Finance says when, where and how money can be spent, saved, taxed or tax-exempted.
Until this week, the Harper government had known only one finance minister: Jim Flaherty. And now, there’s Joe Oliver. He’s inherited a soon-to-be-in-surplus budget, a plan to use it to win re-election for his party, a clamour of outstretched hands and a collection of controversies. To guide him and the government, we offer some advice.
Cut taxes for the majority: That was Mr. Flaherty’s parting advice to his successor and his party. The day after delivering his final budget, he told them that next year’s pre-election document should break one of their flagship promises. He was right.
Mr. Flaherty urged them to go back on a pledge to bring in income-splitting for couples with children. His reasoning was impeccable: The promise, which will cost somewhere in the neighbourhood of $3-billion a year, will deliver a big tax cut to a small minority of upper-income couples with one parent in the top tax bracket, and the other parent with little or no income. The vast majority of Canadians, in contrast, would see little or no benefit. Mr. Flaherty thought this sounded like bad policy and bad politics. It is. Getting elected could prove more difficult if the flagship initiative in next spring’s pre-election budget involves using a middle-class majority’s taxes to lower the tax burden on an upper-income minority. Take Mr. Flaherty’s advice and give this a rethink. You’ve got a year.
Make the tax system simpler, not more complex: Mr. Flaherty did this in the case of business taxes, by broadening the tax base, closing loopholes – and lowering business tax rates. But on the personal income tax front, it was another story, with budgets giving birth to a series of micro-targeted tax breaks (hello, children’s fitness tax credit) for micro voting blocs. These initiatives may have come from the PMO rather than Finance, but either way the impulse to turn the tax code into a spoils system should be reined in.
Be transparent about where the money went: This is one of the more surprising and disappointing legacies of the Flaherty era. The government would issue comprehensive budgets, but at year’s end, actual spending would be different. The spending plan passed by Parliament and the spending facts of government became ever more divorced. Allocated money going unspent and unexplained frustrated the Parliamentary Budget Officer, making it in some cases impossible for him to do his job of overseeing budgeted spending on behalf of Parliament. There’s no reason for this to continue. No public company would let itself be run like this.
Don’t phone bank CEOs, demanding higher mortgage rates: Mr. Flaherty was right to have worried about the possibility of an overheating housing market, and he took a number of sensible steps to cool things down. But remember those times he called the heads of financial institutions, demanding that they raise their mortgage rates? It was banana republic behaviour. Please, no more.
Keep watching the housing market: The run-up in Canadian housing prices is troubling. The goal of Mr. Flaherty and the Bank of Canada was to ensure that the bubble, if there is one, deflates slowly, over many years, rather than suddenly. Mr. Oliver needs to keep a watchful eye on this. He also needs to ensure that the government is gathering more and better data on what exactly is driving the market. No one seems to know enough about who exactly is buying Canadian homes and condos – investors versus owner occupiers and foreign buyers versus residents, for example. More information would help us better understand what’s making this housing market tick.
Continue the push for a national securities regulator: Mr. Oliver spent most of his career on Bay Street. He knows how important it is for our mid-sized investment market to avoid balkanization under 13 provincial and territorial regulators. Enough said.
Give CPP expansion another chance: Several years ago, it looked as if Mr. Flaherty was open to dealing with the long-term problem of insufficient retirement savings by expanding the Canada Pension Plan. Then he and the Conservative Party put the notion into the deep freeze, apparently ideologically opposed to the idea of government doing more. But CPP expansion makes sense. Most provinces want it, and most Canadians would benefit from it. The Conservatives need to get over their ideological hang-ups and embrace the idea. Simply urging people to save more on their own is a recipe for failure.
Has the 2015 budget already been written? It’s clear the answer is largely “yes.” But what’s been written needs to be questioned. As the previous finance minister understood, changed circumstances – economic or political – may call for a change in policy. He backtracked on income trusts, and was right to. He reversed course and went against cherished Conservative beliefs in putting together a recession-fighting economic stimulus plan; that was also the right move. Governments can change their minds. Sometimes they have to. Even this government.
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