Fiscal math = tax hikes to balance the budget
TheGlobeandMail.com – Opinions – Fiscal math = tax hikes to balance the budget. Will politicians tell the budgetary truth, and would we punish them if they did?
Published on Thursday, Jan. 14, 2010. Last updated on Saturday, Jan. 16, 2010. Jeffrey Simpson
The federal budget looks complicated and, in some senses, it is. But it’s also quite a simple affair.
About half of Ottawa’s roughly $230-billion non-debt spending is transferred to people (pensions, unemployment insurance, children’s benefits) and provinces (equalization, health care). The other half goes to programs that Ottawa itself delivers, such as defence, research and student aid.
This split leads to the two fundamental questions facing Canadian politics: Will politicians tell the truth, and would we punish them if they did?
At issue is how to emerge from deficits of more than $100-billion amassed to combat the recession. The Harper government, now “recalibrating” after proroguing Parliament, insists the budget can be balanced in five years. How? By waiting for economic growth to reach about 3 per cent annually, and by reducing increases in government spending.
A growing body of expert opinion, however, says the government is kidding itself and, by extension, the citizenry. At least four former senior Finance Department officials, including two former deputy ministers, think the government is dreaming. So does Parliamentary Budget Officer Kevin Page, and independent economists such as Dale Orr.
Their point, expressed in articles, analyses and interviews, is quite simple: The government is overestimating future economic growth and the ability to cut spending. As a result, the deficit will not be gone within five years.
The Parliamentary Budget Officer underscored the point this week: Canada will face a structural deficit of $19-billion in five years, a point that contradicts the government’s blue-sky prognosis. This estimate is premised on economic growth for the next five years being less than 2 per cent. The PBO’s analysis was supported by Scott Clark, a former deputy minister, and Peter DeVries, a former director of fiscal policy, who have sent their detailed critique to their old department.
Mr. Clark and Mr. DeVries discuss the half-and-half budget. Okay, they say, the government has ruled out any cuts to transfers to people or provinces. There goes half the non-debt budget. How about the other half? Ottawa would need to find savings of about $20-billion from the remaining $115-billion to balance the books. Good luck.
The biggest single item in the budget’s second half is defence (almost $20-billion). Any Conservative appetite for cutting there? How about first nations (almost $8-billion)? University research ($3-billion)? Atlantic offshore revenue payments ($3.5-billion)? And so on.
Some spending a government can’t cut, because it’s legislated; other spending cuts would create a hue and cry. So, sure, the Harper government can show considerable spending restraint – a big change for a government that’s let spending rip – but not nearly enough to balance the budget. Any suggestion to the contrary can be charitably described as unrealistic or uncharitably described as completely political.
Which brings us to the outside economists’ two other points. The government could just let the deficit linger beyond five years. After all, a $20-billion deficit would be just 1 per cent of GNP, and thus much less than in the nightmare years of debt in the late 1980s and early 1990s.
But higher interest rates are coming. So interest payments will grow on the debt accumulated before and during the recession, plus the sums piled up in the years to come, adding to future fiscal pressure.
Nothing will have been done to prepare for the fiscal impact of the aging population. No provision will have been made for economic slowdowns or shocks. In other words, the lingering deficit approach is a mixture of crossed fingers and imprudence.
The economists all believe the federal government should raise taxes to eliminate the deficit with certainty, pay down debt to prepare for aging, and give Canada a buffer against future shocks. Their preferred tax increase, of course: Raise the GST.
They argue, correctly, that the federal government has been cutting taxes since Paul Martin’s time as finance minister such that the revenue-to-GDP ratio has fallen from 18 per cent to 14.5 per cent in less than a decade, while program expenses have actually risen during the same period.
Are Canadians mature enough to understand that this fiscal math requires some tax increases to balance the budget in a timely fashion? The evidence, judging by the Conservatives’ all-politics-all-the-time approach and the timidity of the Liberals and NDP, shouts No.
< http://www.theglobeandmail.com/news/opinions/fiscal-math-tax-hikes-to-balance-the-budget/article1431298/ >