One of the key selling points of federal carbon pricing is that it is revenue neutral, a phrase meant to distinguish the carbon levy from other kinds of taxes, and to assure Canadians that the government’s intent is to drive down greenhouse gas emissions rather than fill up its coffers.
But is Ottawa’s claim accurate? The government defines revenue neutrality, essentially, as all of the proceeds from carbon pricing flowing through to other entities, whether individual households or businesses receiving grants. “The federal carbon-pricing system returns all proceeds to individuals, families and businesses through payments and climate action programs,” states the government’s climate plan.
The large majority of proceeds, 90 per cent, are sent to households as annual (soon to be quarterly) payments to offset carbon costs. Those payments mean that around 80 per cent of households receive a payment that more than covers annual carbon costs; the other 20 per cent are higher-income households that have bigger carbon bills, and so end up being out of pocket. But the definition of revenue neutral is from the government’s point of view. The fact that some individuals, and many businesses, have to bear additional costs doesn’t invalidate the government’s claim.
There is still the remaining 10 per cent of carbon revenue to be accounted for. Under Ottawa’s plan, all carbon revenues generated within a province subject to the federal backstop are recycled back to that province. So, broadly speaking, the extra cash that Albertans, for instance, pay because of carbon pricing reappears in that province either in the form of rebates to households or emissions-reducing grants.
Does that mean that carbon pricing is revenue neutral? Ottawa says yes, since none of the funds go into general revenue. But the government is making decisions on how to spend that money, even though it is earmarked for a specific purpose. For the government’s assertion of revenue neutrality to hold, that spending has to be defined away as a transfer of revenue.
It’s worth noting that British Columbia’s carbon tax, launched in 2008, was a much more straightforward example of revenue neutrality. The province reduced individual and corporate income taxes to offset, and then some, the amount of carbon revenue it raised (until it abandoned the goal of revenue neutrality, that is).
Lastly, there is a significant hole in Ottawa’s assertion that federal carbon pricing is revenue neutral: the hundreds of millions of dollars that the government collects in GST on top of the carbon levy. Last year, the Parliamentary Budget Officer estimated that the resulting annual GST revenue will rise to $235-million this year. The federal government does not include that revenue in its calculation of revenue that it returns to households and businesses.
If only for that reason, it’s not accurate – or at least not precise – for Ottawa to say that federal carbon pricing is revenue neutral.
Responding to The Globe’s coverage of the Canada Emergency Wage Subsidy program, one reader commented that the costs of the program are overstated somewhat, since corporations will pay taxes when they might not otherwise been able to do so.
That’s true, but only up to a point. According to an analysis from the PBO, corporate tax revenue does indeed offset some of the cost of CEWS. The PBO analysis examined the program as it existed in mid-December, so it does not take into account the slightly larger version of CEWS that exists today. Still, the pattern the PBO outlined is clear – corporate taxes reduce the cost of CEWS, but the expense remains substantial.
For fiscal 2020-21, the PBO estimated that corporate tax revenue of $11.5-billion would decrease the expense of CEWS from a gross cost of $85.55-billion to a net of $74-billion. For fiscal 2021-22, the gross CEWS cost of $12.9-billion fell to a net of $12-billion after taking into account added corporate tax revenue. For both years, what starts out as a gross cost of $99.4-billion drops to a net of $86-billion.
So, even with the additional tax revenue the government is able to capture, CEWS remains an expensive program.
First, stop digging: Fitch Ratings has a sobering analysis for anyone thinking that advanced economies can spend freely and grow their way out of their pandemic debt. In a report issued last week, the ratings agency throws a big splash of cold water on the theory that governments can count on a protracted period of low interest rates to gradually decrease the debt burden relative to the economy (a theory that Ottawa has signed on to). “History confirms that low interest rates relative to GDP growth is neither a necessary nor sufficient condition for reductions in government debt ratios,” the report states.
Fitch looked at 29 instances since 1960 of developed economies reducing government debt ratios by more than 10 percentage points (two of those examples were Canadian). Interest rates were not consistently lower than economic growth through those 29 cases – but operating budget surpluses or very small deficits were the norm, Fitch notes. Fiscal discipline drove debt reduction. Or, as the saying goes, when you find yourself in a hole, the first thing you should do is stop digging.
If history is a guide, debt reduction in the years ahead will require fiscal adjustments in addition to low interest rates.
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