Jim Flaherty led the charge toward lower corporate taxes, but a new report by the Parliamentary Budget Officer says these and other Conservative tax cuts now leave Ottawa short on cash it plans for a return to balanced books.
Cutting corporate taxes and the goods and services tax rate were key early measures taken by the Finance Minister during the Conservative government’s first term in office. Mr. Flaherty said lower corporate taxes are key in attracting international investment and convinced some provinces to do the same.
Those cuts were coupled at the time with increased spending on transfers to the provinces, followed by recent deficit spending to spur the economy through the recession.
Now that the government is beginning to chart its course to erase the deficit, a new report (PDF) by Parliamentary Budget Officer Kevin Page is pouring cold water on some of Mr. Flaherty’s key assumptions as to how that can happen.
First, the Finance Minister is counting on economic growth as a key factor that will increase government revenues over the coming years.
Don’t count on it, Mr. Page says.
He puts Canada’s gross domestic product on a downward trend, projecting it will grow on average only 1.9 per cent over the period between 2009 and 2014. His report says this view takes into account the changing demographics of the workforce.
Secondly, even if the government successfully shuts off the taps on all stimulus spending by 2011 and keeps government growth below four per cent, it still will not have enough money coming in to erase the deficit.
As a result, Mr. Page said there will be a structural deficit of $18.9-billion in 2013-14, which is the period when Ottawa expects to be narrowing in on a balanced budget.
“The decline in the government’s structural balance relative to potential income over this period is largely due to lower revenues,” says the PBO report, titled Estimating Potential GDP and the Government’s Structural Budget Balance.
“Despite increased [Employment Insurance] premium and [personal income tax] revenues over the medium term, statutory corporate income tax and GST rate reductions push the projected level of structural revenues relative to potential income close to their lowest level since 1976-77.”
The Conservative government lowered the GST rate to five from seven per cent, which is generally translated into an annual revenue loss of $12-billion. Mr. Flaherty also cut the corporate tax rate from 22.12 per cent in 2007 to 15 per cent in 2012.
Because the government has ruled out increasing taxes as an option for balancing the budget, Mr. Page’s numbers suggest Ottawa will need to be more aggressive in cutting spending that has so far been suggested.
Mr. Flaherty has said that if economic growth comes in lower than expected, savings can be found by not renewing government programs that have a set end date. He has also said that savings can be found in the government’s $35-billion staffing bill by not replacing retiring baby boomers.
