A national carbon tax is the better way to square the Liberals’ deficit circle

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TheGlogeandMail.com – ROB/Commentary
Apr. 01, 2016.   John Richards

John Richards teaches in Simon Fraser University’s public policy school and holds the Roger Phillips chair in social policy at the C.D. Howe Institute.

There are good arguments for running a deficit this year. Beyond the case for particular programs is the context of low interest rates, due to international financial market conditions and to Canada’s history of fiscal rectitude over the past two decades.

So far, so good. But last week’s federal budget projects a cumulative $100-billion deficit over the life of this Parliament, and no date for a balanced budget. That is not so good. Among those with a memory of the wrenching fiscal austerity of the mid-1990s, it raises the misgiving that Prime Minister Justin Trudeau’s government is returning to the lax fiscal attitudes of governments led by his father, Pierre Trudeau, and by Brian Mulroney. Under their leadership, Canada became, by the early 1990s, one of the most indebted of the Organization for Economic Co-operation and Development countries, with one of the highest relative deficits.

Scott Clark and Peter DeVries, two former senior Finance Department officials, lived through the fiscal adjustments required in the mid-1990s, at both the federal and provincial level. In an op-ed published in Report on Business last week, they make a convincing case for a short-term deficit and diagnose what’s wrong with the recent federal budget: This government is proposing to squeeze a Liberal spending program into a fiscal framework bequeathed by the Conservatives, with no acknowledgment that the new spending agenda will almost certainly require higher taxes to be sustainable.

Sooner or later, there will have to be a reconciliation of revenue and spending – and better now than later, they argue. Their prescription is to restore the GST to its former level, a two-cent increase, equivalent to about three-quarters of 1 per cent of GDP. Incidentally, Canada is currently among the bottom quarter of OECD countries in terms of overall taxing effort.

I agree with the diagnosis, but not the prescription.

While Ottawa will run deficits, given the present government’s spending intentions, the provinces are also in dire need of additional revenue – primarily due to the budgetary implications of an aging population’s health-care costs. Raising tax revenue by, say, 2 per cent of GDP is a more reasonable estimate of the increase in taxing effort to finance the health-care costs of aging boomers and this government’s agenda of spending on infrastructure, expansion of aboriginal education, new “carrots” to induce a green economy and so on.

Instead of an increase in the GST rate, a better option is some version of a national carbon tax.

Appropriately, Mr. Trudeau’s government has put an end to the Conservatives’ climate change skepticism and participated enthusiastically at the recent COP21 climate conference in Paris. The recent budget contains 20 pages of those carrots, but virtually all modelling suggests the need for “sticks” to realize any substantial decline in carbon emissions. The budget says nothing about pricing emissions as a necessary stick (beyond an opaque, four-line discussion of tax treatment of corporate payments for emissions permits, on page 160).

The B.C. government’s Climate Leadership Team recently described the provincial carbon tax as “our strongest tool to reduce emissions” and recommended $10-a-tonne annual increments (for many years) as the key to future provincial – and national – policy. The B.C. tax is presently frozen at $30 a tonne – at $60 a tonne, a national carbon tax would raise annual revenue equivalent to about 1 per cent of GDP.

A carbon tax ramping up over the next decade to, say, $120 for every tonne of emissions would raise about 2 per cent of GDP annually when fully in place. How much of the carbon-tax revenue accrues to Ottawa or the provinces is of secondary importance to politicians acknowledging the need for a tax increase relative to the Conservatives’ low-tax legacy and the need for sticks as well as carrots if Canada is to meet its carbon emission goals.

Admittedly, this is not a revenue-neutral proposal that offsets carbon revenue with reductions in other taxes. Which is not to suggest a “revenue neutral” carbon tax would be popular – recall the fate of the Liberals’ “Green Shift” electoral campaign in 2008 and the partisan conflicts in the 2009 B.C. provincial election. And it would raise a traditional Canadian squabble as to which order of government gets how much of the revenue arising.

On the other hand, an increase in the GST is not politically popular either. Tax increases never are – in the short run.

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