GLOBAL ECONOMICS
Patrick Grady
The Liberal Pre-Election Budget Disguised as an “Update”
November 14,2005
Minister of Finance Ralph Goodale unveiled the Liberal campaign platform today. It was called “The Economic and Fiscal Update,” but was really a full-fledged pre-election budget containing a whopping $39 billion in proposed tax and spending initiatives.
A real “update” would have limited itself to providing a revised economic and fiscal forecast as a basis pre-budget consultations for next February’s budget. Any tax or spending measures would be relatively small, or purely housekeeping.
The Finance Minister presented his package as “A Plan for Growth and Prosperity” complete with an accompanying white paper. But while his “update” contained some measures to create opportunities for Canadians(training) and to promote an innovative economy (R&D), its main component was $30.3 billion in tax reductions, $27 billion of which were personal income tax cuts. The “update” would definitely stimulate growth, but not through targeted supply side measures, Instead good old fashioned Keynesian tax cuts promise to put anywhere from hundreds to thousands of dollars in the pockets of families of presumably grateful Canadian voters. And it will do this through tax reductions, some of which such as the acceleration of basic personal amount increases and the reduction in the first bracket rate from 16 per cent to 15 per cent, start retroactively as of January 1, 2005. This means that big refund checks totally over $5 billion will be going out this spring provided, of course, the “update” tax legislation is passed in time and not derailed by any pesky election.
In contrast to the generous personal income tax cuts in the “update,” the corporate tax measures are very small if those February 2005 budget measures, which were previously announced, but temporarily shelved to placate the NDP, are excluded. And they offer no permanent reductions but only an acceleration of the elimination of the federal capital tax. After the February 2005 budget measures, which lower the corporate tax rate from 21 per cent to 19 per cent and eliminate the 1.12 per cent surtax starting in 2008 , Canadian corporate taxation will be competitive with that in the United States. But it risks falling behind if the measures proposed by President George Bush’s panel on tax reform are implemented as has been argued by Jack Mintz, the President of the C.D. Howe Institute.1
People may wonder where the Finance Minister found all the money to finance such a marvelous pre-election bonanza, without abandoning the Government’s deserved reputation for fiscal responsibility that it earned by wrestling its inherited $42 billion deficit to the ground and racking up a string of eight consecutive surpluses, which make the Canada the fiscal envy of the G7. After all, as recently as last February when it brought down this year’s budget, it was projecting a budget balance (after making allowance for a $3 billion contingency reserve and a prudence factor starting at $1 billion and growing to $4 billion). This left no further room for deficit-increasing measures at that time. That, of course, was before $60 per barrel oil and comparable natural gas prices were entered into the equation. Consequently, corporate income tax is now expected to be $4.6 billion higher in 2005-2006 growing to $10.7 billion higher in 2009-2010 than expected as recently as last February. Personal income tax is also expected to be almost $2 billion greater this year, providing an additional unanticipated source of funds.
A risk that the Government hasn’t acknowledged is that oil and gas prices may not remain high forever as assumed in its “update” forecast. If they do fall at some point, it will be left with a revenue and expenditure structure generating a large deficit. This, some older observers may recall, is exactly what happened in the early 1980s when the much hated National Energy Program fell apart, leaving the Government with imaginary revenues and all too real spending commitments, which led to large and growing deficits over much of the decade. Counting on revenues from volatile energy price revenues can hardly be considered a “prudent” budget strategy. It may turn out to be okay, but then again it might not.
Say what you will about the longer-term economic merits of the “update,” it can not be denied that it is a political masterpiece. By incorporating large personal tax cuts and at least lip service to productivity and competitiveness concerns, it veers sharply to the right cutting the ground right out from under the Conservative opposition, while at the same time differentiating its approach from the bigger-spending NDP.
It will be hard for Conservative Leader Stephen Harper to oppose the large tax cuts in the “updates” and he won’t have much fiscal room left to propose many initiatives of his own. This leaves him in the unenviable position of pursuing a “me-too” strategy. And even the NDP will have a hard time not going along with the tax cuts for low and middle income. Both of these opposition parties will surely regret that they didn’t come together earlier to pull the plug on the Government before it had the chance to introduce its little “update.”
This leaves only the Bloc Québecois still in a strong position because of the much greater importance of the sponsorship scandal and the Gomery Commission report in Québec politics. Judging from recent polls, it is only in that province that there is really a strong appetite for an election to punish the Liberals. Elsewhere in the country the “update” may help to ensure the return of another minority Liberal Government, which leads to the more existential question of why we need an election at all at this point.
1. Jack Mintz, "Tax Heat Is On: The United States is serious about tax reform, which only puts further pressure on Canada to clean up its own house -- now," National Post, November 10, 2005, p.FP19.
This commentary is based on the comments made on Mike Duffy Live on CTV Net after being released from the lockup.