The Harper government's budget-cum-economic statement yesterday posed a $34-billion question: Will politics triumph over sound economics?
If the answer is yes, then the Conservatives are away to the political races. If the answer is no - that sound economics will triumph over politics - then the Conservatives will struggle.
The $34-billion figure is the estimated cost to the federal treasury - or "benefit" to the taxpayers of Canada - from cutting the GST by one point, from 6 per cent to 5 per cent, from 2008-2009 to 2012-2013.
The Harper Conservatives promised this GST cut, and the previous one from 7 per cent to 6 per cent, in their election manifesto. It was bad economics then, and it's bad economics now, as almost every business, labour and academic economist in the country would say or has said.
But the GST promise, then as now, is all about politics.
Hence the question: Will politics triumph over sound economics?
The Harperites obviously believe politics will win, so their party will gain a majority government built in part on Canadians' gratitude for the money saved on the GST cut and the perception of a party that keeps its election promises, no matter how wrong-headed.
That the Harperites presented these massive tax cuts in an October economic statement, instead of waiting for a March budget, illustrates their political motive to be ready at any time for an election and, of course, to keep the Liberals backpedalling.
The sheer size of the GST cut should be put in the context of Finance Minister Jim Flaherty's moves. Taxes will come down by $60-billion, of which the GST cut will represent $34-billion, or 57 per cent of the total package.
It's therefore fair to define Mr. Flaherty's package of measures as dominated by the GST cut. Personal income taxes will fall only $11-billion, and corporate income taxes by slightly more than $14-billion. Given the worldwide competition for capital, the need for investment, and the trend elsewhere to lower corporate taxes, the corporate income tax cut can be defended.
But the GST cut encourages spending and consumption, neither of which the economy needs. Instead, what the economy needs to be more productive are savings and investment, both of which are best encouraged by cuts to personal income taxes and investments in the country's physical infrastructure and intellectual development.
So, to present an economic package that offers $3 in consumption tax savings for $1 in personal income tax savings is an economic travesty, a resolute defiance of international practice, a willful disregard of informed domestic advice, an economic nonsense, and a political bet on economic illiteracy.
The Harperites reckon, however, that it is easier politically to sell a GST cut, pure and simple, than to try explaining the more intelligent but more complicated alternative of reducing personal income taxes. The GST cut is tactile and visible; personal income tax cuts are hidden and delayed.
As one television commentator kept saying to Conservative MPs yesterday, "You must feel as if you've won the lottery," the presumption being that Canadians will reward the party for the GST cut.
And, indeed, they might reward the Harper Conservatives, provided taxpayers don't think about alternatives. But any citizen who worries about the long-term economic health and competitive position of the Canadian economy should be disconsolate at the missed opportunities.
Think about what else could be done with that $34-billion.
Income tax cuts, especially targeted to those who need help most, would stimulate savings and investment and be fairer than what was announced yesterday. Similarly, a competitive economy desperately needs more investment in the country's physical infrastructure.
The government, to its credit, has already announced investments of this kind - the Western Canadian Gateway, Via Rail improvements, border installations, clean technology funds. But the national infrastructure deficit is huge.
Large surpluses offer the perfect time to make those long-term investments to help the economy become more competitive and productive.
The two points shaved off the GST cost about $12-billion a year, or $60-billion over five years. With that money, the government could have cut two to three points off personal income taxes, and had billions left over for investments in physical infrastructure and human capital development.
The country's long-term economic future would have been so much better off.
