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(Sean Kilpatrick/Sean Kilpatrick/The Canadian Press)
(Sean Kilpatrick/Sean Kilpatrick/The Canadian Press)

Economy Lab

Stop fudging: Why Ottawa must hike taxes, cut back Add to ...

The most important problems with the budget that was tabled in the House of Commons yesterday were the less-than-completely-credible projections for revenues and expenditures over the next five years. Revenue estimates were predicated upon the federal government’s abandonment of boutique tax cuts that had offset the revenues which would have otherwise been produced by increasing incomes, and expenditure forecasts were based on unspecified future cuts in spending.



But now that it looks as though the budget will not pass and that we will be having an election, it’s only fair to note that the Conservatives are not the only ones with such credibility issues.



It’s important to remember that the federal government is running a structural deficit. The budget’s credibility issues do not involve implausibly optimistic assumptions for economic growth. The problem is that even with that growth, the deficit will persist unless something is done: spending will have to be reduced, or taxes will have to be raised.



The story changes only slightly if the recent cuts to corporate taxes are rescinded: the real challenge is to fill the hole left by the cuts to the GST. The Conservatives’ solution was a set of dodgy assumptions about slowing the rate of future spending. Strategies that involve higher rates of spending without significant increases in taxes – of a size on the order of those lost from the GST cuts - are even less credible.



This will be something to watch in the upcoming campaign. The party that forms the next government will have to implement a combination of tax increases and spending cuts on the order of $12-billion to $14-billion. The only real question is how.



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