Anxiety over projections of red ink in the federal budget through 2015 and beyond sparked a flare-up over the goods and services tax recently. Suggestions by business leaders, and a prominent banker in particular, that Ottawa should reinstate the 7-per-cent GST to get back to a surplus drew a rebuke in a Conservative Party e-mail. An alternative path - spending restraint - could help move us past this dichotomy, and the government should take the lead with a tough and convincing budget on March 4.
Certainly the anxiety over the federal deficit is well-founded. Business leaders, policy-makers and most adult Canadians recall the frustrations of trying to rein in government over-borrowing in the 1980s and early 1990s. To get stuck on the same treadmill of interest payments mounting beyond the capacity to pay in the coming decade would be doubly foolish.
Unlike last time, when the movement of the baby boomers into their highest-earning (and highest-taxpaying) years gave a fiscal boost, the boomers are now beginning to leave the work force. Equally serious, governments around the world are in deep fiscal trouble: Fears of inflation and even default in some cases could drive borrowing costs much higher, pushing interest payments, taxes and borrowing up together.
As for the debate over the GST, feelings are high because even before the financial crisis and slump made it look fiscally imprudent, the cut to 5 per cent pitted business people and economists against political tacticians.
Most of the former see the GST as a "good" tax - much less economically damaging than alternatives such as taxes on personal incomes and business profits. For them, the cut was a missed opportunity for implementing growth-friendly tax relief instead.
Politically, however, cutting the visible and unpopular tax looked smart. The 5-per-cent GST was one of five key planks in the Conservatives' first winning election platform, one they felt obliged to enact early in their mandate. Reversing the cut would be intensely embarrassing, and advice to do so is correspondingly irritating.
We should consider what outcome promises the best fiscal future for Canada.
If, as most business people and economists would prefer, consumption taxes such as the GST should provide a larger share of government revenues over time, the provinces need them far more than Ottawa. The provinces face the relentless pressure of health-care spending as the boomers age, and the GST-like taxes that Newfoundland and Labrador, Quebec, Nova Scotia and New Brunswick already have, and Ontario and British Columbia soon will, are the most robust sources to fund it.
Ottawa's fiscal situation has deteriorated so sharply partly because both the previous Liberal and the current Conservative governments committed to increase transfers to the provinces faster than the economy and the federal tax base can grow. This situation is not just fiscally unsustainable, it also undermines accountability: Governments serve citizens better when the legislature that provides the programs levies the taxes.
Those transfer commitments expire before 2015, and by then Canada will be better off if Ottawa is raising and transferring less money, and the provinces are posing honest questions to their voters about how to fund their health-care promises.
The battle also risks obscuring the key fact that Ottawa does not need to raise taxes to balance the budget. The scary projections start from a stimulus-bloated baseline. As many commentators have pointed out, and as the C.D. Howe Institute's upcoming "shadow budget" documents, simply returning real per-person spending to its 2008 level can end deficits before 2015.
The spending cuts overseen by prime minister Jean Chrétien and finance minister Paul Martin in the late 1990s not only yielded big surpluses, but also were accompanied by robust economic growth. Similar moves today are both desirable and practical.
The main obstacle to balancing the budget through restraint is opposition inside the government and among those who benefit from its spending. Talk of tax hikes will strengthen that opposition and make a necessary job harder.
Prime Minister Stephen Harper and Finance Minister Jim Flaherty can and should lay out a credible path for spending that restores budget balance before five years have passed. If they do not, people will infer that the government lacks the conviction or will to proceed. In that case, the pressure for tax hikes will grow - and if the government responds to that pressure, it will be more damaging personal and business taxes, not the GST, that go up.
If the March 4 budget does lay out a clear and compelling program of spending restraint, the task of restoring fiscal balance will be far easier to accomplish.
William Robson is president and CEO of the C.D. Howe Institute.Report Typo/Error
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