It's too simple to dismiss Peters's criticism as partisan. Before Ragan's Finance appointment, he called the GST reduction a "stupid policy." Provided you accept the need to raise money to run the government, consumption taxes are generally considered the best way to do it because they distort behaviour the least. If a government is prepared to sacrifice revenue, economists such as Peters and Ragan tend to argue that income and corporate taxes should be the target.
Equally offensive to economists is the Conservative government's penchant for smallish tax credits for everything from tool boxes to hockey registration. As with the GST, purists say there is a better way: Lower income taxes and let consumers spend the extra money where they want. These boutique measures also complicate an already complicated tax code, wasting resources that could otherwise stoke economic growth. Flaherty's first budget in 2006 was loaded with such baubles. "It was the kind of thing that gives policy a bad name," says William Watson, a conservative commentator and a colleague of Ragan's in McGill's economics department. "He got taken to task by the policy class for throwing those trinkets onto a Christmas tree-type budget."
Flaherty is unrepentant about the GST cut. Over the G20 weekend, he says, he had a spirited debate with his British counterpart over the issue of consumption taxes. George Osborne, a Conservative, had just laid out plans to raise Britain's version of the GST as part of the new government's program to narrow a massive budget deficit. "I know the argument about consumption taxes," says Flaherty. But what economists fail to take into account, he says, is the psychological value in cutting a highly visible levy. "There is something else that goes on too, and that is, middle-class people don't believe that governments reduce their taxes," Flaherty says. "But if you do it on a consumption tax, people see it. That, in part, restores faith in government. Taxes don't always go up, they can go down, and they see it every time they buy something."
That sounds like a rationalization. But it did make Ragan see the GST cut in a different light. "One of the things I learned in Ottawa is it's not just about economies and it's not just about economic efficiency," says Ragan. "Those people may not understand economic efficiency, but maybe I don't understand politics."
Whitby, Ontario, seems like a long way from Washington, especially when you are sitting in the Treasury Department's gilded Cash Room with finance ministers and central bankers from the U.S., Japan and the European Union. And it's Friday, Oct. 10, 2008. And you hear that some major international banks might not open on Monday.
Flaherty has recounted this moment on many occasions over the past year, describing it as a turning point in the financial crisis. He and his counterparts from the G7 countries realized the global economy had become bigger than they could control. Ministers and central bankers ripped up the pre-arranged text intended to summarize their meeting and rewrote it in the room, pledging to back any systemically important financial institution.
Most of the world's top economic officials were in Washington for meetings of the International Monetary Fund and World Bank. The G7 got endorsement of its plan from China, Brazil and other big emerging market economies by taking it to the G20, then a secondary forum. And that November, the leaders of the G20 met for the first time and planned fiscal stimulus equal to at least 2% of gross domestic product. In September, 2009, in Pittsburgh, the G20 officially replaced the G7 as the pre-eminent body for global economic co-operation, and the member leaders laid out a plan to overhaul financial regulations by the end of this year.
This amounts to the biggest reordering of the global economy since the International Monetary Fund, World Bank and World Trade Organization were established after the Second World War. In the middle of all this was Flaherty, whose turn it was to hold the G7 presidency in 2010. Given the rise of the G20, he could have let the G7 tradition drop. Instead, he ordered Canada Goose parkas for Federal Reserve chairman Ben Bernanke, European Central Bank president Jean-Claude Trichet, U.S. Treasury Secretary Timothy Geithner and the rest of his counterparts in the group, and hauled them up to Iqaluit for a meeting in February.
From the frigid outside looking in, the ensuing gathering was more photo opportunity than frank policy discussion. The closing press conference was perfunctory, with Flaherty mostly blocking any of his fellow ministers from engaging with the international financial press. But behind the scenes at this confab and others, Flaherty was building his reputation as a minister of substance.
"His international reputation is very strong," says Gordon Nixon, CEO of Royal Bank of Canada, who was impressed by how easily Flaherty handled himself when G20 finance ministers met with business leaders on the sidelines of the June summit. "He is held in very, very high regard by his counterparts."