The budgetary march to perdition

By Travis Fast

It would be fun watching the Tories engage in populist public policy-making and crass electoral triangulation if it did not make for such a mash of incoherent fiscal policy. Where is the evidence that Canada needs a macroeconomic boost from cutting consumption, income and corporate taxes? And where is the proof that the boom will last forever?

Designing tax policy as a broader part of economic policy should always be guided by what problems you face now and potential problems you face in the future. In the short term Canada is growing at a solid pace with unemployment in many jurisdictions at or under full employment. Hence there is no need for a massive bout of pro-cyclical tax cuts.

At the same time the high dollar which is causing problems in the manufacturing sector and some commodity sectors (forestry for example) was nonetheless potentially set to do the dirty work of cooling some parts of the economy to free up resources for the booming parts of the economy. Whatever the long-run wisdom of this process of adjustment may be (i.e., moving resources and capacity from dynamic manufacturing and renewable resource sectors to non-renewable and highly cyclical sectors like oil, gas and construction) it nonetheless had a certain short-term logic to it. Yet this is now off the table as the government has introduced a highly simulative tax package that will surely blunt whatever depressive effects the high dollar might have had for the overall economy and will do nothing to target those areas where the high dollar is wreaking havoc.

A more nuanced tax package would have been to provide tax relief and incentives for those sectors and segments of society who need it. Why do the top 25% of households need both an income and consumption tax reduction? Why do energy companies need a reduction in their corporate tax rates? Why do financial companies need any more liquidity than they have been given since the unwinding of the silly season? And if they do, surely it need not come in the form of reduced corporate taxes which will simply be passed on as higher shareholder dividend payments and CEO compensation.

This budget is born of ideological idiocy, as much from anti-state populism as liberal economic folk wisdom (which itself has a good dose of anti-state populism). It is not as if, as some would have it, that there is a firm link between, for example, high consumption taxes and savings or between reduced corporate taxes and investment or vice-a-versa (praises be, because that kind of general stimulus heads in the direction of the redline).

Right now the Canadian economy needs a particular kind of stimulus both in the short and long term: productivity enhancing investment with a green tinge. And here there is plenty of heavy lifting for both the public and private sector. The private sector needs to, nay must, in the case of manufacturing raise their productivity to counteract the rise of the dollar. Surely high write-off schedules for targeted sectors, say at 150% of denominated value, for new more efficient means of production would make more sense than a general corporate tax reduction. Surely high write-off schedules for investment in new green technologies would be smarter than general corporate tax reductions which do nothing to direct the pace or direction of investment in such areas.

On the public side: from Halifax to Vancouver there are any number of public investments that need to made: from decaying physical infrastructure to near bankrupt municipalities, through to health care and education. Highly subsidised, efficient and greener forms of public transit could be built over the next ten years enhancing the flow of goods, services and people.

But let me now come to the last point: nothing lasts forever and this now 10-13 year long boom may well have reach its zenith. What is the evidence that the planned reduction in overall taxes will be sufficient to fund existing programs and obligations should the economy start a downturn? Whoever inherits the prime ministers chair in the context of a recession will be forced to choose between two cycle depressing alternatives: cut programs or raise taxes or both. Well there is a third option, a return to the days of massive deficits and a growing national debt.

But none of this seems very fiscally prudent; but then again this budget was not born of even a hint of sober capitalist planning; but rather, political expediency and dismal science. Indeed, it may be the case that Harpers budget is a perfect blend of economic irrationality and irresponsibility both in the short and long term: the road to perdition.

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