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david parkinson

Jim Flaherty's departure as Canada's Finance Minister comes at what seems a fitting time on several levels. He's handing over the reins after having eliminated what had become a massive budget deficit during the Great Recession, and before the next election that is shaping up as a contentious one for his long-ruling Conservative party. He's moving on after publicly exposing substantial rifts between himself and Prime Minister Stephen Harper, specifically on a proposed income-splitting plan, that may have made it difficult for the two men to work together on future tax-policy initiatives.

But it's hard to avoid the thought that he's also leaving just as the truly hard work begins.

For most finance ministers, bringing budgets into balance, and keeping them there, is enough of a legacy. And Mr. Flaherty was able to do at least the first part of that – reversing a $55-billion deficit to a projected surplus in just five short years. That's a laudable, indeed a Herculean, feat. Along the way, he also cut the federal corporate tax rate to 15 per cent from 22 per cent, introduced the Tax-Free Savings Account, and imposed tougher rules on mortgages that appear to have helped slow Canada's runaway housing market.

Yet under Mr. Flaherty's watch Ottawa also became increasingly fond of spending. Program expenses are now equivalent to 13.5 per cent of gross domestic product, up from 12.5 per cent when he took the job. The gap between the rich and the poor has widened. Canadians are carrying record debt levels.

Most importantly, Canada's economy has stalled as the recovery of the rest of the world has accelerated, leaving Mr. Flaherty's successor to manage an economic underperformer. And Mr. Flaherty's zeal for rapidly bringing the budget back into balance, even as a sputtering economy made a good case for continued government investment as a stimulus, may well have contributed to the loss of economic momentum.

Compared with trying to shape fiscal policy in a way that will restore the long-term health of the economy, bashing the revenues and expenses into balance looks easy. And keeping the budget in balance after a significant belt-tightening period, particularly at a time when slow economic growth will lend little support from the revenue side, could also prove more difficult than merely achieving that first balance that Mr. Flaherty has apparently attained.

His successor faces a clear need to take advantage of the restored budget health by launching a growth strategy – a new fiscal direction that will fuel economic expansion. Should we spend the spoils on tax cuts (a Conservative favourite, especially with a 2015 election looming) or on much-needed infrastructure investments (a favourite among economists as a long-term driver of productivity and growth)? Will either of these help bring Canada's flagging exports back to life? How do we devise a tax policy that will finally spur the corporate productivity investments that have proven so elusive in this country for so long, and are approaching a critical point?

These are difficult questions, and represent far more of a policy challenge than the mere goal of balancing a budget. But answering them is no longer Mr. Flaherty's problem.