Friday, January 09, 2009

On Michael and tax cuts, and politics too

Michael Ignatieff had a well-attended town hall meeting in Halifax yesterday, an event which seems to have generated a whole heckuva lotta coverage on the CP Wire. I'll deal with a few of them in separate posts, beginning with the economy.

If you've been reading this corner lately you'll know I've been interested in the upcoming budget and the forms of stimulus under consideration. I'm strongly supportive of a comprehensive package of infrastructure funding and feel its our best and most effective stimulus option.

Therefore, I was pleased to see Michael say a Liberal-led government would get the infrastructure money flowing more quickly so we can get shovels in the ground:

He said he would get a team together to call municipal leaders across the country to find out what infrastructure projects they need and how fast they can get started. That got the attention of Halifax Mayor Peter Kelly, who was sitting near the back of the auditorium.

"I’d phone you and say, ‘What do you need?’ " the Liberal leader said to Mr. Kelly.
"I’ve got a list," the mayor hollered back. "$1.2 billion."

Mr. Ignatieff said Stephen Harper’s Conservative government has been "astoundingly slow" in getting infrastructure money out the door, something he said has to change.

"We’re in a crisis. We’re in a serious crisis," he told reporters. "And I would rather err by doing it fast and making the occasional mistake — which then you, the voters, punish us for later — than sitting there saying, ‘Have we got all the boxes ticked?’ "

I have also been making the point that in my view, and in the view of many economists (with the exception of the alleged economist occupying the corner office in the Langevin Block) that tax cuts are extremely ineffective as stimulus. They will, by and large, be pocketed and not spent, defeating the purpose.

That's why I was disappointed to hear this from Michael:
"I think it’s going to be important to get stimulus into the Canadian economy fast, so we may be looking at tax cuts very quickly, tax cuts targeted at medium and low income, to boost their purchasing power fast," Mr. Ignatieff told the crowd of 200 at Neptune Theatre.

When asked later what form those tax cuts might come in, Mr. Ignatieff told reporters he’s in favour of the kind that are permanent, rather than a one-time break.

I'm disappointed to see Michael buying into the tax cuts as stimulus argument, but I can't say I'm surprised. It's politics.

*Why is Obama pitching large tax cuts as part of his stimulus package in the US? Politics, he needs to win over congressional Republicans for his larger stimulus package.

*Why do I fear Harper pushing large tax cuts masquerading as stimulus? Politics, he would want to both a) force the opposition to either support bad policy or vote against tax cuts so he can run an election on it, or b) further reduce government revenues in support of his ideological mission of dramatically shrinking the size, scope and power of the federal government.

*And so why is Michael speaking our for tax cuts as stimulus? Politics.You might not win an election running on tax cuts, but you sure won't win one running against them. So while I'm disappointed in one sense, in another a little political judgment every now and again isn't a wholly bad thing.

The litmus test for me, however, will be in what size and kind of tax cuts the Liberals propose. I do take some solace in the fact Michael was talking about “tax cuts targeted at medium and low income (earners).” I think the lower down the income scale you go, the more likely it is any tax cut will be spent rather than saved, increasing the likelihood of some stimulus resulting. So any tax relief, and I have said some minor relief as a sweetner wouldn't necessarily be a bad thing, must be targeted.

The majority of stimulus spending however must go to temporary infrastructure spending. Besides being more effective, the key word there is temporary. Remember, we're going into deficit to finance this, and we'll need to come out of deficit soon. (And if history is any indicator, it will be a Liberal government called on to balance the books). Infrastructure spending is a temporary expense. Permanent tax cuts (temporary would not be politically salable) would mean a permanent drain on government revenues, meaning the foregone revenue would need to either be recouped through a) tax cuts, or b) cuts to program spending. If history has taught us anything, it's that tax cuts won't pay for themselves.

While I recognize the need to position us in a politically salable position around tax cuts ahead of the budget, I hope we bear in mind the need to balance good politics with good policy, as well as Harper's true conservative motive in pitching tax cuts: making the federal government small enough to drown in the bath tub.

Tax cuts if necessary, but not, scratch that...

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WesternGrit said...

Good post. I'm quite confident he is being cautious and political. We aren't seeing the real plan yet...

Anonymous said...

I'm disappointed to see Michael buying into the tax cuts as stimulus argument, but I can't say I'm surprised. It's politics.
Apart from not working (as you state), I don't think it has to be politics....
A clear explanation explaining why it does not work should be enough...

Mike said...

I agree it seems to be bad politics, but good policy to come against tax cuts now but Iggy has to be careful he doesn't come out as being all over the map.

Just a few weeks ago he said:
"If we are in a deep deficit in year 3 or 4 you can't exclude tax increases to get us out. Canadians understand how bad deficits are"

Personally I think what he said then makes perfect sense, but I don't see how it jives with making "permanent" tax cuts now, especially since as you note it will be make it harder to get out of deficit later.