Social Policy in Ontario

The economy: How the parties differ

Posted on April 23, 2011 in Debates

Source: Globe & Mail — Authors: Barrie McKenna

TheGlobeandMail.com – news/politics
Published Friday, Apr. 22, 2011. Last updated Saturday, Apr. 23, 2011.   Barrie Mckenna

Health care and the economy are the two issues Canadians consistently say mean the most to them, but they’re not getting that much substantive air time in the campaign. With this primer, The Globe and Mail addresses that. In this special feature, economic-policy reporter Barrie McKenna applies a reality check to the three main parties’ fiscal platforms.

Conservatives

Assumption: Canada’s economy is recovering better than most and Canadians would be foolish to risk that recovery by switching horses now.

The facts: Conservative Leader Stephen Harper brags that Canada is enjoying the strongest recovery of any country on Earth. While the claim is hard to measure precisely, it is almost certainly untrue.

Canada bounced back from the recession relatively quickly. But so did a number of other countries. Through the first three quarters of 2010, Canada ranked 25th in growth of gross domestic product for the year among 53 countries reporting to the International Monetary Fund, behind two G7 partners (Germany and Japan) and 10 other wealthy members of the Organization for Economic Co-operation and Development.

The jobless rate fell sharply in 2010 – to 7.6 from 8.4 per cent. But 27 of 74 countries reporting to the International Labour Organization did even better.

And past performance is no guarantee of future gains. The Tories, or whatever party forms the next government, will face a host of challenges, including the high dollar, the possibility of higher interest rates, inflation and the still-shaky U.S. recovery.

Assumption: Corporate tax cuts are the key to creating jobs and economic growth.

The facts: The overwhelming weight of academic literature suggests that taxing corporate profits is the least efficient way to raise government revenue because it hurts productivity, investment and international competitiveness.

Political parties of all stripes have cut corporate tax rates accordingly. The Conservatives go a step further, arguing that lowering corporate taxes will spur economic growth and create thousands of jobs.

On that score, the economic literature is less definitive. Companies are profit-making machines, and they invariably pass along higher costs to consumers (via higher prices) or workers (via lower wages or fewer employees). But creating jobs depends on much more than the tax rate. Exchange rates, labour conditions, costs of materials and regulations are often more important.

Assumption: The deficit can be wiped out in three years by cutting government waste.

The facts: Finance Minister Jim Flaherty’s March 22 budget projected a surplus in 2015-16.

Less than three weeks later, the Conservatives’ election platform predicted a surplus a full year earlier. Hitting the target a year early depends on extracting $4-billion a year from federal government operations.

The Tories have been clear about what they won’t cut – transfer payments to the provinces for health care and key programs.

Instead, Mr. Harper has talked about shrinking the civil service as baby boomers retire and overhauling different government computer systems.

Progress won’t be easy. The government has been squeezing the bureaucracy for years. Moving to new computers will initially cost money, and the resulting savings could be minuscule ($40-million a year, according to one internal government estimate).

And attrition is great, but eventually essential personnel must be replaced as demands on services grow, wiping out the bulk of any savings.

Liberals

Assumption: With the economy still fragile, the prudent budgetary approach is to go slower on deficit reduction and selectively invest in key programs.

The facts: It’s all about balance, Liberal Leader Michael Ignatieff argues. A Liberal government would reinstate the 2010 corporate tax rate of 18 per cent, scrapping cuts made in 2011 and planned for 2012. The Liberals estimate that would raise $5-billion to $6-billion a year – money they would reinvest in students, caregivers and parents. The Liberals would also put $3-billion into a “prudence reserve” to cover unforeseen economic events.

Instead of balancing the books in 2014-15, like the Conservatives, the Liberal plan would leave the current target of 2015-16 untouched. They promise instead to cut the deficit to 1 per cent of GDP within two years. This scenario hinges on getting that extra revenue from higher corporate taxes. But the Finance Department suggests that staying at 18 per cent generates $4.5-billion a year. It could even be less, if companies react to the higher rate by investing less.

Assumption: Canada’s corporate tax rate is already pretty competitive so borrowing more to cut the rate further is unwise.

The facts: The Liberal platform features a graph showing Canada with the second lowest corporate tax rate in the G7 last year (just slightly higher than Britain’s). With the country running a large deficit, Ottawa would have to take on debt to pay for cuts in 2011 and 2012. That would leave Canada with the lowest rate in the G7, and well below the United States.

The catch is that you can’t just compare Canada with the rest of the G7. A better basis for comparison is the 34-member OECD (the world’s most advanced economies). And Canada’s combined federal and provincial corporate taxes are higher than the OECD average. Indeed, 23 countries have lower rates.

Voters should also be aware that corporate tax rates aren’t the only factor companies consider when they ponder investing in plants and jobs. A whole range of things beyond Ottawa’s control also affect where companies invest, from exchange rates to labour costs.

Assumption: Targeted tax breaks for special “champion” industries will boost Canada’s lagging productivity and create jobs.

The facts: The Liberals are looking to create jobs by showering special tax advantages on three champion sectors – clean resources, health and biosciences and digital technologies. The idea is to concentrate limited resources in industries where Canada already has a competitive edge in the world to create thousands of jobs for the future.

A Liberal government would do it by creating a new innovation and productivity tax credit, which would give investors a 15-per-cent credit for investing in early-stage start-ups in those sectors. They would also extend the resource sector’s popular flow-through share model – which extends tax breaks to investors rather than to the companies issuing the shares – to provide added incentives for the targeted industries.

All special tax breaks are prone to abuse unless closely monitored and implemented. Unfortunately, the Canada Revenue Agency doesn’t have a good track record of ensuring that unworthy applicants are weeded out.

NDP

Assumption: Targeted payroll tax breaks are a better way to create jobs than across-the-board corporate tax cuts.

The facts: Like the other parties, the NDP says it’s committed to low corporate taxes. Its platform pledges to keep the federal corporate tax rate “always” below the comparable U.S. rate.

But the NDP is giving and taking at the same time. The corporate tax rate would go back to 19.5 per cent, from 16.5 per cent now. The extra revenue would be plowed back into targeted business tax breaks aimed at spurring job creation, including a reduction in the small-business tax rate (to 9 from 11 per cent) and a job-creation tax credit that will provide up to $4,500 for every new hire an employer makes.

Not only would the main tax rate on profits go up, but the NDP would also squeeze billions more from businesses to finance nearly $21-billion a year in new programs. Ending oil-and-gas industry subsidies and closing tax loopholes would bring in up to $5.2-billion a year. A cap-and-trade system for carbon emissions would raise $7.4-billion a year from greenhouse-gas emitters. And restoring the 19.5-per-cent corporate tax would net nearly $10-billion annually by 2015. Of course, by raising the overall tax burden, the NDP runs the risk of stifling economic growth.

Assumption: Canada will never get anywhere on climate change unless it sets clear targets for carbon-emission reductions.

The facts: The NDP stands alone among the parties in putting a firm greenhouse-gas emission target (80 per cent below 1990 levels by 2050) in its platform. It would also impose a form of carbon tax to help get there – a cap-and-trade system that would eventually raise up to $7.4-billion a year from polluters. Most of that money would be reinvested in various “green” initiatives, such as public transit and energy efficient homes.

The NDP has essentially adopted what leading scientists say would be needed to curb the Earth’s warming trend. It’s also the same target contained in two failed NDP-sponsored bills. The platform doesn’t explicitly say so, but reaching the target comes at a price – typically a “carbon” price, paid by consumers. The Pembina Institute has estimated that Canada could feasibly reach an interim emission target (20 per cent below 1990 levels by 2025) by raising the price of carbon by $100 a tonne. That’s the equivalent of roughly 20 cents per litre of gasoline.

Assumption: The public pension system is in crisis and badly needs an overhaul as baby boomers get set to retire.

The facts: The only source of income for many elderly Canadians is what the federal government pays them through the Canada Pension Plan and the Guaranteed Income Supplement. Unfortunately, that can mean living in poverty. So the NDP wants to eventually double CPP benefits. The party would also pump an extra $400-million a year into the GIS for the poor.

The NDP is offering much more than the other parties on pensions. But as with its other promises, there’s a steep price. The GIS boost would be covered by higher corporate taxes.

Doubling the CPP would mean higher premiums for workers (currently set at $2,217 for 2011). Doubling benefits would presumably mean doubling that to $4,400 a year. Employers would also have to boost premiums, offsetting the impact of other job-creating incentives in the NDP platform.

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Tags: budget, economy, globalization, ideology, standard of living, tax

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