OTTAWA — Canada's leading economists have told Finance Minister Jim Flaherty to move smartly on broad-based personal and corporate tax cuts, but that the government's favourite hobby horse — a GST cut — is not a priority.
The minister met in private with about 10 economists in his Toronto office for about two hours Friday morning in a wide-ranging discussion on the economy, taxes, the high Canadian dollar and skills training and education.
The meeting was not announced publicly and Flaherty did not make himself available for an interview afterwards, but Canadian Press talked to more than half of the economists present and was able to piece together the broad strokes of the discussions, including that the minister intends to hand down the fiscal update ”very soon.”
“I can tell you what I told him,” said Dale Orr, managing director of Global Insight Canada. “You have to get on with broad-based tax cuts and the sooner the better.”
Mr. Orr would not say what Mr. Flaherty's response to the recommendation was, but others in the room described the minister as mostly in “listening mode.”
Both Mr. Flaherty and Prime Minister Stephen Harper have repeatedly said the government would cut taxes fro individuals and businesses.
Surprisingly, none of the economists attempted to dissuade the minister from going through with the Throne Speech pledge to make a second reduction in the goods and services tax to 5 per cent, a measure that would cost the government treasury an estimated $5.4-billion.
That's because the economists believe the government is committed to the GST cut regardless of the arguments they mount against it.
Internal government public opinion surveys suggest Canadians prefer a GST reduction to income tax cuts because it is more visible and they notice it every time they make a purchase.
Instead, the discussion of the sales tax focused on whether Mr. Flaherty could use the opportunity to convince the five provinces that have yet to harmonize their provincial sales tax with the GST to establish a single value added tax that would apply to an identical basket of goods and services.
In the March budget, the government said harmonization would reduce the tax burden on new business investment in Canada by 6.2 percentage points (4.2 percentage points if Ontario harmonized alone), and go a long way to give Canada “the lowest rate on new investment among the G7 countries by 2011.”
TD chief economist Don Drummond said the harmonization carrot “would be the only silver lining” in a GST cut, which he noted would only serve to encourage Canadians to spend at a time of low national savings. Provinces would benefit from harmonization because a GST cut creates more tax room without raising their sales tax.
“My advice is no surprise to the minister — don't do any more of these targeted tax cuts, make it broad-based and put the GST reduction at the back of a long list [of cuts],” Mr. Drummond said.
The commonly held view of economists is that personal and corporate tax cuts boost the economy by encouraging Canadians to save and invest, and by giving businesses room to invest in expansion, new equipment and technology, and become more competitive.
Some economists said Mr. Flaherty appeared committed to seeking harmonization with the non-participating provinces, Ontario, British Columbia, Manitoba, Saskatchewan and P.E.I.
However, it is unclear whether this would be possible to complete before the next federal budget expected in February, and would rule out a GST announcement in next month's fall fiscal update.
One economist, who asked not to be named, said while most felt tax cuts were needed, a small minority urged the minister to show caution and wait until the budget before acting in case the economy turns sour later this year and early next.
Mr. Orr said his he also stressed harmonization, but said Mr. Flaherty should include personal and corporate tax cuts in the November update. He said he recommended that the minister cut the bottom tax rate by half-a-point to 15 per cent and the corporate rate by a full point to 20 per cent starting Jan. 1.
16:55ET 26-10-07
