Stephen Harper’s historic tax-cutting legacy
TheStar.com – opinion/commentary – The real source of the federal deficit is a paradigm-shifting tax cut agenda pursued by Stephen Harper’s Conservative government with extreme vigour.
Dec 27 2013. By: Eugene Lang
According to a significant chorus of opinion on the right, Stephen Harper’s government has abandoned conservative economic principles. Bastions of conservatism like the The National Citizens Coalition (which Harper once headed), the Canadian Taxpayers Federation and columnist Andrew Coyne, among others, have criticized the Harper government for being unfaithful to the ideology of economic conservatism. The Harperites, who were supposed to be purists, have proven to be just another big-spending, deficit-running, pork-barrelling government like so many other Liberal and Progressive Conservative administrations of yesteryear, according to this critique.
Even the federal Liberals take pleasure in attacking Harper and Finance Minister Jim Flaherty for blowing the surplus they inherited from Jean Chrétien and Paul Martin, implying a Liberal government would have been more conservative on fiscal policy than the Conservatives themselves.
Some commentators and analysts even claim that after nearly eight years in office, and two years of majority government in which the Conservatives have had free rein, Stephen Harper, the Alberta economist and former Reform party MP, has no real conservative economic legacy worth pointing to.
This analysis misses the forest for the trees. In fact, Prime Minister Harper can lay claim to a conservative revolution both in the substance and the politics of federal fiscal policy. You know you are the victor in a political war when your adversaries barely contest the core of your governing agenda, especially if that agenda represents major change. And that is indeed what Stephen Harper has achieved in the fiscal realm.
The critics are right that the Harper government went on a spending spree during its first few years in office when it was in a minority position. Spending increases during Harper’s first term were higher year over year than those of the previous three federal governments. Spending accelerated further in the second Harper term when the recession and global financial crisis hit, forcing the Conservatives to put in place a stimulus program to jump-start a sputtering economy, something every advanced country in the world did at that time. It is often argued that this spending is the reason the government found itself mired in big deficits very shortly after coming to office.
But the source of the federal deficit goes much deeper than the usual minority government largesse and recession-induced stimulus. The real culprit is a paradigm-shifting tax reduction agenda, pursued by this government with extreme vigour.
In case you haven’t noticed, Ottawa has been afflicted with tax-cutting mania for many years now. This began under the prime ministership of Jean Chrétien and continued under Paul Martin, at a time when the feds were awash in surpluses. But it has reached its zenith under Harper. Tax cuts have been the defining feature of the Harper record, and have been pursued regardless of the state of the federal balance sheet.
Over the past eight years, most major categories of federal taxes have been cut deeply — from personal income taxes, to corporate income taxes, to the GST — so much so that Canada now has the second lowest business and consumption taxes in the G7. In addition, a litany of tax credits have been put in place, notably the Children’s Fitness Tax Credit, the Public Transit Credit, The Home Renovation Tax Credit and The Tax Credit for first time home buyers. And added to the list is income splitting for seniors — another major tax cut — which the government has committed to extend to families once the deficit is eliminated.
As you might expect, a tax jihad of this magnitude, like all wars, drains the treasury. One credible estimate pegs the total value of these tax cuts to be on the order of $45 billion annually in foregone revenue. To put that figure into context, it’s about one third more than the annual cost of Old Age Security, the biggest and most expensive federal social program, and about two and a half times the size of the federal deficit.
The cumulative effect of all these tax cuts has given the Conservative government their most powerful talking point, laid bare in October’s Throne Speech — “Overall, the federal tax burden is at its lowest level in half a century. As a result of our government’s low-tax plan, the average Canadian family now pays $3,200 less in taxes every year.” This is now the government’s signature political message. And it reflects a historic conservative policy achievement.
The federal revenue to gross domestic product (GDP) ratio — a rough proxy for the size and reach of the government — is now about 14 per cent. A dozen years ago, before the tax-cutting mania began, it was 18 per cent. The comparable figure in anti-government Washington is 19 per cent. In Australia, it is 21 per cent.
You would think with such a historic and far-reaching ideological achievement the political parties on the left and in the centre would be assailing the Conservatives for this. Yet opposition criticism is muted.
The NDP argues for incremental revenue restoration through tweaks to corporate income tax rates and possible increased taxes on the highest income earners, both of which are largely symbolic and will do little to unwind the fiscal structure the Conservatives have put in place. The Liberals, for their part, are silent on taxes, but were at pains in the last two elections to argue whatever changes they might make to the tax equation would be “revenue neutral.” In other words, the revolutionary tax paradigm the Conservatives have established is the new normal in Ottawa and deviations from it are at the margin.
Ottawa’s new fiscal structure, put in place incrementally through successive federal budgets, is the central Conservative governing achievement and it is a momentous one. Federal revenue has been reduced to its lowest level relative to the economy in two generations. As a result, Ottawa’s capacity to author significant new programs — to deal with issues like income inequality, rising health-care and post-secondary education costs, and an aging population — is neutered, especially when no political party is willing to make the case for substantially increased revenue and all are committed to balanced budgets.
This represents the triumph of Canadian fiscal conservatism, which for a generation has been rooted in constraining and containing the role and reach of Ottawa. The Harper fiscal structure is potentially as transformative on the federal government’s role as Pierre Trudeau’s Charter of Rights and Freedoms and Brian Mulroney’s free trade agreement with the United States, both of which placed significant and permanent constraints on Ottawa’s powers.
During the first few years of Stephen Harper’s prime ministership, progressives worried that his well-known decentralist, small government orientation would result in a legislative initiative to constrain the use of the federal “spending power,” that important tool federal governments have used from time to time to show national leadership in areas of provincial jurisdiction — notably in health care, education and welfare. But the feared legislation never materialized. Ottawa’s spending power remains intact. Conservatives, however, can take solace. You don’t need a law to constrain Ottawa’s spending when you have emptied Ottawa’s wallet.
Eugene Lang is BMO Visiting Fellow, School of Public and International Affairs, Glendon College, York University. This essay is an adaptation of a lecture he gave at Glendon College in November.
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