How to cut at 25 billion dollar deficit

A couple days ago, I was excited and terrified by a tool that the Globe and Mail put on their website. In the days coming up to the budget, they wanted to promote a conversation. Simply put they wanted people to make suggestions about how to fix the Federal Government’s Fiscal Deficit.  Using the estimates from the last budget, they estimated that the Budget deficit for 2011-2012 would be $25-billion.

For a nerd like me, this was exciting stuff. So I started using it to see how I could get rid of the deficit in question. Due to the nature of the tool, the choices were limited. However, even so they were quite instructive. Given my desire for fiscal accountability, it seemed to be right up my alley.

However, even I was surprised by the outcome. For, to get an estimated $1.8 Billion Surplus, I had to do more than I thought. In the process, one thing became very clear: If one wanted to obtain a budget surplus without ideological bents, service cuts and tax increases are necessary.

For example, I tend to agree that raising the eligibility age for Old Age Security (OAS), is a necessary ‘evil’. Given longevity trends, as a society, we will most likely have to reset retirement expectations for most of us. Therefore, changing the OAS eligibility by two years is a good way to go. Furthermore, as a younger Canadian, the early announcement gives many of us more than 20 years to prepare for that inevitability. However, the Globe and Mail tool indicated that the change would only provide a savings of about $4 billion dollars.

While cutting, government departments, something I would also do, provides $8.2 billion dollars in savings. Yes, that’s right a Liberal would advocate cutting both the military and CBC. But here is where it gets tricky. In my mind, income tax increase on individuals and corporations should not go up. While taking larger corporations – according to the tool would provide – $1.5 billion dollars in revenue and taking all individuals could provide $9.4 dollars in extra revenue, one must ask whether Canadians could accept with such a choice. I don’t think they would.

For nearly two decades, Canadian Governments have been fighting to restrain taxes and spending increases to ensure that we are competitive with the rest of the world. This restraint has stopped, both in fact and rumour, the brain-drain phenomena. Flight of capital and people is a great fear in an open economy and income tax hikes might encourage that.

So the question is how do you come up with the rest of the money? What do you cut or what do you tax? For, the deficit according to this tool is still more than $13 billion dollars. The Globe and Mail Tool tells us that very few other items will get one to $13 billion dollars. For example, if one cuts health care only $1.6 billion is available. Eliminating tax credits for any combination of professionals – including Volunteer Firefighters, professionals, clergy and meal deductions for corporations – will net somewhere between  $15 million to just over $1 billion dollars. Of course, depending on how one implements those cuts.

Cutting the RESP grant nets $660 million, while getting rid of VIA Rail provides $527 million. We can reduce our diplomatic effectiveness by callously reducing our foreign aid budget. It is at $510 million dollars. Yet, those changes in spending will cause the World Community to ignore the advice of the Canadian Government the next time we have something to say about a disaster in Asia or Africa. Or one could just look at the case of Libya and Syria. Canada was largely bypassed up until we provided troops, material and foreign assistance aboard. If one remembers the old say, “Money talks”, truer words have not been spoken.  Lastly, the Film tax credit is at $225 million; but reducing that item means losing jobs across the country.

In other words, cutting all of those things that Conservatives hate will not get anywhere near the $13 billion dollars that they need to find. Furthermore, it could upset their base or their constituents across the country. This is why in the Conservative Budget, they talked about finding efficiencies. Like Michael Wilson and Paul Martin before him, Finance Jim Flaherty will learn that $13 Billion in efficiencies is most likely not there to be had. For, cutting of the civil service has been going on since Mulroney. As per reports in our national media, this has meant that the Federal Civil Service lacks both experienced staff members and knowledge at all levels. In fact, in talking to some Civil Servants, the Federal Government is having trouble keeping experienced staff members. All of them leave for the public sector to be outside vendors or consultants. This means that cutting the bureaucracy of the Federal Government, over the long term, will actually led to huge increases in labour costs and not the decreases that some have argued.

The other falsehood will be the increasing reliance on individuals. For example, as I noted, the Agricultural Community will likely have a reckoning. Over the next 10 to 20 years, Western Farmers will likely suffer from some form of weather borne tragedy and help will be needed. I ask you, what are the chances that they will be allowed to fail? Under the Mulroney Government, farmers were helped out of a financial and weather borne crisis; I would argue that a future Liberal or Conservative Government will do the same. For most Canadian Governments abide by a simple rule: their constituents expect that governments will provide care to communities that need it because they would expect the same in return.

Oh and as for economic growth, that can only go so far. Ontario and Quebec have a population of over 20 million people with an economy of close to $1 trillion CAD. Compare that to Alberta’s population of about 3,645,257 with an economy of $178.225 billion. Does anyone really think that Alberta’s present economic growth can save an economy that is almost ten times its size? To save Ontario or Quebec, Alberta’s economy would have to grow faster than China’s and that is not in the cards.

More notable people than me have said something has got to give. The Parliamentary Budget Officer, last year, noted that the Government was in a Structural Deficit. Patricia Croft, on CBC’s National on March 29th, indicated that she would love to see the GST return to 7%.  The fact is that without income tax increases or huge downloading to the provinces, we need more.

It is obvious that we all will have to feel some pain. The elimination of various tax credits is necessary and the reversal of the TFSA programme is required. According to the Globe and Mail, if we cancelled the Children’s tax credit, Children’s art credit, the public transit tax credit and the TFSA progamme; one would get $585 million in savings.  Additionally, if we returned the GST to 7%, $11.4 Billion in federal government revenues would return.

Furthermore, we might even have to accept the extension of the GST to food with a rebate for those who are lower income. That would bring us the rest of the way with $2.8 billion dollars in revenue. All of that would only give us a $1.8 billion dollar surplus. So the RRSP programme would be left alone and Income taxes would not be touched.

We have heard the argument for years that Canada has an uncompetitive tax system. However, the truth would surprise most Canadians. For, Canada has a very competitive taxation system. In the OECD, the highest taxes places are Hungary, France, Austria, Norway, Belgium, Italy, Sweden and Denmark. Four out of every ten dollars ends up in government coffers. Below them are the Netherlands, Luxembourg, Slovenia and Germany. Or put differently, if one excludes Italy, the highest taxed places in the Western world are actually the powerhouses of the European Continent.

Canada has the 17th lowest taxation system, when compared to the 34 OECD members. What is more interesting is who is below us. They include countries like Ireland, the US, Japan, Portugal and Spain. Or put differently, many of the countries below us are in the process of arguing about how they are going to increase taxes. The US is the most interesting because many of their income and payroll tax systems are artificial low due to Bush-Era “tax cuts”. Those cuts are set to expire in 2012 or 2013. Since the US Congress is deadlocked on cuts, the US might just find themselves with a more expensive tax system than Canada in a year or two. Furthermore, if we compare ourselves to Europe, the US and other OECD members, one will find that our “tax wedge” (i.e. income tax plus employee and employer social security contributions  minus cash transfers ), is among the lowest in the Western World. If we are not below the US, UK or Australia, we are within five percentage points of them. Additionally, we still have not discussed the privatization of health care costs in those countries.

So if we want to have a government that has the same benefits as those in Europe, the US and the rest of the Western world, Canadians will have to come up with the money to pay for them. Either, we have to increase the pie or shrink our expectations. If Canadians wish to have the same level of security as exists in Europe – in regards to food safety and personal safety – taxes will have to be paid. As a Liberal, evidence is the key to policy making. So like Mulroney and Chretien, if Mr. Harper just looks at the facts, he will find that he will have to return taxes to level they were at when he took office. That is if he is non-ideological, pragmatic and looks at the facts and they tell us one thing.

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