Bill Morneau pledges to spend — but first he has to cut

Posted on February 7, 2017 in Governance Policy Context – Full Comment
February 6, 2017.   JOHN IVISON

On Monday, Bill Morneau indicated that his government, already on course to record a deficit of $25 billion, is set to splurge still more.

“Our focus will be on helping those most vulnerable,” he said in Question Period, referring to “investments” he is planning to make in the next budget.

It may be presumptuous to assume the Liberals care about how much red ink is swilling around. But let’s make the assumption they would prefer to ensure the deficit is only three times as bad as they said it would be when they got elected. If so, the finance minister needs to find some revenue from somewhere — anywhere.

His problem is that whatever he does, it is likely to upset a sizeable subset of Canadians.

Having ruled out taxing health and dental benefits, he may opt to eliminate the deduction on meals and entertainment that make corporate boxes feasible at hockey games, or kill the age amount tax credit claimed by people aged 65 and over.

Whatever he does, it’s clear that all the low-hanging fruit has been picked. If the government plans to spend any money in this budget, it will have to be funded from new revenue sources — and there is likely to be a political cost to tapping those streams.

This will delight the Department of Finance.

When the late Jim Flaherty was finance minister in Stephen Harper’s Conservative government, the department recommended he tax health and dental benefits, on the basis that low-income Canadians without private health plans were subsidizing those with employee-sponsored plans.

Morneau may find a way to take with one hand and give back at least a portion with the other.

To Finance, many of the 150 existing federal tax credits, worth around $100 billion a year in foregone revenue, are simply tax leakage — politically-motivated bribes aimed at buying votes.

Flaherty rejected the advice but the Finance mandarins are patient souls — they simply waited for the next government to show up, then wheeled out the same recommendation.

This time it got more traction, particularly after the panel of seven external experts hired by the Liberals to make the tax expenditure system more “fair, efficient and simple” also endorsed it.

However, word leaked that the $2.9 billion in benefits was in the government’s crosshairs and, as opposition coalesced, Justin Trudeau concluded that upsetting millions of voters by increasing their tax bills by more than $1,000 each was too toxic.

Veterans of Flaherty’s office suggest that the department’s major pet peeve was always the $670 million a year spent subsidizing drinks and fine-dining for corporate executives.

The corporate sector argues that they are taxed on profits and entertaining clients is part of the cost of doing business — 50 per cent of which is tax-deductible.

But for a revenue-hungry government with aspirations to a more equitable tax system, the prospect of making businesses pay for their own largesse may provoke a contraction, rather than an expansion of the deduction.

Again, such a move would bring blowback. The idea was raised by former Ontario finance minister Dwight Duncan back in 2012 and the Ottawa Senators responded by saying the move would put the team out of business.

An even bigger pot of honey for the Liberals is the age amount tax credit, claimed by 5.2 million Canadians and costing the federal treasury $3.4 billion a year.

The Macdonald Laurier Institute think-tank has targeted it as “basically indefensible.” The credit was established in 1972 to help low-income seniors cover their cost of living. Expansion of the Guaranteed Income Supplement, the Canada Pension Plan and the Old Age Security program have diminished its importance. “Yet it continues to provide public benefits to seniors earning as much as $75,000 a year. It is now basically a tax benefit for being aged 65 or more,” MLI claims in a paper to be released later this month.

The public-policy defence for eliminating the credit is that poverty for seniors, at just 6.7 per cent, is lower than the poverty rate for children or for the working-age population, which subsidizes the benefit.

It would be a very bold government that killed a credit for seniors and spent the money on another segment of the population.

But Morneau may find a way to take with one hand and give back at least a portion with the other.

Both the meals and entertainment deduction and the age amount tax credit would be high on any economist’s list of expenditures that distort the fairness, simplicity and efficiency of the tax code. But killing them would come with a cost.

As Brian Lee Crowley, managing director at MLI, put it: “Any easy hits have been taken a long time ago by revenue-hungry predecessors to the current government. Pretty much all the choices available are politically hard and/or economically damaging.”

The Liberals are at a crossroads. One path leads to runaway deficits; the other to bankrupt hockey teams and mutinous seniors. Let’s hope Morneau chooses wisely.

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