Tuesday, February 23, 2010

What do Gerard Kennedy and The Fraser Institute have in common?

What do Gerard Kennedy and The Fraser Institute have in common? They both want to have a conversation about raising the GST.

To be fair, that’s probably about all they agree on. For example, I don’t think the PMO is preparing an attack piece against their think tank friends like they did on Kennedy. But they do both raise interesting points worth considering.

A couple of weeks ago Kennedy raised the issue in a press conference, saying that a growing chorus of experts say a sales tax increase to help tackle the deficit should be discussed:

Leading economists, former Finance officials and Parliamentary Budget Officer Kevin Page have all said sales tax increases are required to balance the books. It has not gone unnoticed among some Liberals that in Britain, the Conservative opposition is leading the polls and winning praise for "authenticity" after proposing specific deficit-fighting measures that include some tax increases.

"I think we do need to talk about it," Mr. Kennedy said yesterday in an interview with The Globe and Mail.

"I do think we need to talk about a fiscal plan. That debate is internal to the Liberal Party now and I'm not pronouncing on it."

Gerard appeared to be freelancing a little ahead of party policy here, as the Liberal powers that be quickly made clear. And the Conservatives wasted no time heading to the attack. They likely won’t be attacking their ideological cousins at the Fraser Institute, who came out in a recent National Post op/ed in favour of increasing the GST:

For the next several years Canada will be hamstrung by deficits that will hinder any improvement in Canada’s competitiveness, especially on the tax front. However, increasing the GST would create the revenue needed to reduce other, more damaging taxes (i.e. those on income and capital gains) that would dramatically improve Canada’s competitiveness.

I disagree with the Fraser Institute (probably Gerard does too) that we should use increased GST revenues to lower other taxes while making massive cuts to government spending. I don’t think the budget can be balanced on their rosy timeline (not without the massive structural cuts they want and I don’t) so we need that GST revenue to balance the books and preserve core programs. Still, we are agreed that a sales tax increase should be a legitimate topic of discussion for dealing with the current economic situation.

And were we in rosier times I’d actually find more agreement with the Fraser Institute on swapping income tax revenue for sales tax revenue. Long-term, cutting income tax makes sense. Heck, their op/ed is basically a validation of the Liberal taxation policy of Jean Chretien and Paul Martin, who favoured income tax cuts once the budget was balanced and introduced the largest personal tax cuts in Canadian history. And the Fraser Institute op/ed is also a condemnation of Conservative economic policy, as it was the Harper Conservatives that raised income taxes (by cancelling planned Liberal cuts) to pay for their GST cut.

Anyway, we’re getting signals now that the Conservative budget coming in a few weeks, despite the vitally necessary prorogation, will largely stay the course with no major program spending cuts, no tax changes, basically nothing new. Basically they’re continuing with their “we’ll balance the budget by magic” plan.

That’s not good enough, and Canadians know it. Unfortunately, the Liberals have thus far opted for the magic approach to budgeting as well, wanting I suppose the Conservatives to show their cards first and also not wanting, I’d imagine, to set themselves up for easy attacks.

Well, it’s coming to put-up or shut-up time, and it may be time for one of those mythical “adult conversations.” It’s time to start having an honest conversation with Canadians about how we see the fiscal situation shaking-out in the next five to 10 years, how we’re going to get back to balance, and what the choices are going to be that we’ll have to make. And magic won’t be part of the equation.

Myself, I think we should consider a sales tax increase if we can tie it to preserving specific core services (or new ones, such as early learning and child care). Polling shows Canadians will support taxes if the revenue goes to services they value and think are important.

We need to lay-out a timeline for returning to surplus. And I don’t think it needs to be overnight. I want us balanced but we shouldn’t slash and burn to get there. We should chart a course that makes an argument for preserving important programs and even investing in new priorities (because we can’t afford to stand still and stop investing in the future), while outlining the measures that will need to be taken to return us to a surplus track.

It will be a challenging debate. The Conservatives will distort and attack any proposals made, while still refusing to admit to Canadians that hard choices will need to be made. We need to expose their empty rhetoric and the inadequacy of their projections.

And if this debate shapes up as one of interventionist government vs. small government that’d be just fine with me, and I know which side of that one I’d like to argue. And I think most Canadians would be with me too.

It’s starts, though, with adult conversations. Gerard and the Fraser Institute have gotten us started. Let’s all take it from there.

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jfhelmer said...

Hi Jeff:

Definitely restoring the GST to 7% is a good way to start. I invite you to join the small but growing Facebook group of Canadians who agree.

Kim said...

Corporations are taxed on Profits at a very low rate, whereas income taxes are taxed on income at a higher rate. Taxes on the rich should go up as well. Ask the CEO of TD Bank!

Eugene Forsey Liberal said...

Excellent post. One may disagree on the details, but the basic point is excellent: must examine taxation with maturity, in terms of fiscal situation and vision for Canada. Public always wants impossible, excellent services and low taxes, but if forced to choose between higher taxes-better services and lower taxes-worse services, time and again, they go for former, by hefty majorities, into 70s+. But they must be forced to choose, in clear, open debate. Otherwise, confusion & sophism allows bad fiscal & social policy through the back door, pleasing some important opinion-making elite interests, but contradicting and hurting vast majority of Canadians.

CanadianSense said...

Great post. A minor detail missing is EAP is a two year Plan. A significant amount of money is already planned and until the economy shows more signs of a recovery the government has stated on 50 occassions "we are following the plan". Did you not get the memo?

In 2009-10, provinces and territories received $53 billion in major transfers – an increase of $13.1 billion since 2005-06. These transfers were estimated to account for about 19 % of provincial and territorial revenues in that year.

In December 2008 our PM was busy with our Premiers and the G20 getting it done.

We need to show some patience for the all the "budgeted" spending to actually take place don't you think before making more changes.