Harper’s Challenge
Taxes/ Economy impact families

September 12, 2008
By John Williamson

Canada began the 1970s with total government spending accounting for 36% of the country's economic output. The United States stood at 32.3% and the G7 average was 32.6%. Yet, the ravenous appetite of the state grew and grew, taxes increased and deficit spending became routine. By 1992, government activity in the U.S. accounted for 38.5% of all economic activity and 42% in the G7, increases of 19% and 29% respectively.

The growth of government in Canada meanwhile was even more stunning. Total government outlays at home devoured an astounding 53.3% of GDP. The state had grown by 48% and, rather than playing a helpful role in the economy, had instead become the problem. In 1992, Ottawa's deficit was $39-billion and one third of all federal tax revenues were spent on interest payments. The Wall Street Journal subsequently declared Canada an "honorary member of the Third World in the unmanageability of its debt problem" in an editorial entitled "Bankrupt Canada?"

Canada got serious about cutting government spending, selling Crown assets, eliminating deficits, limiting government involvement in the economy and eventually lowering taxes. By 2006, government's take of the economy was 39.5%, a decrease of 13.8 percentage points, and is now less than the G7 average of 40.4%. It is also only 3.1 percentage points higher than the size of the U.S. government relative to its economy, which today stands at 36.4%. Back in 1992, government in Canada was 14.8 percentage points larger than government in the U.S. (The spread between all government revenues remains higher at 6.2 percentage points because Canada is running surpluses and the U.S. funds spending with massive budget deficits.)

Government is still too big and consumes too many tax dollars. But the hard work is paying dividends as government has improved its balance sheet and loosened its grip on taxpayers, businesses and the economy. Today, unemployment is low, inflation contained, the dollar strong, and homeownership high. It has been an era of greater prosperity and opportunity.

At a campaign rally this week Prime Minister Stephen Harper told Canadians our country will remain a bastion of economy strength. This is true, provided Ottawa does its part and does not again muck-up the economy by growing and spending excessively. So where might be Canada going?

Taxpayers are already aware of the Liberal's proposal to lower income taxes on business and personal income but impose a carbon tax on traditional energy sources. Opposition leader Stéphane Dion calls his plan revenue neutral because "every dollar raised by the carbon tax will be returned to Canadians in tax cuts." But this is not accurate. A revenue-neutral tax plan matches a tax hike with a dollar for dollar reduction in other tax rates.

Mr. Dion will instead levy a $15-billion carbon tax on traditional energy sources. The revenue will be used to lower personal and business income taxes by $9.5-billion. Low-income families will receive payments totaling $4.5-billion and the remaining $1-billion spent on research and development. In other words, for every $2 in income tax relief there will be $3 in additional taxes and another $1 in spending. This plan will grow the size of government, drain more resources from the economy, and make middle-class families poorer.

So what about the governing party? Unlike the Grits, they have yet to release a platform. The Conservatives' first campaign promise was a small, but agreeable $600-million reduction to the federal tax on diesel. Whatever else they offer on the campaign trail many taxpayers will evaluate the Conservatives on their tax and spending record. That review is decisively mixed.

First the good news: taxes. The Conservative government got off to a rough start in 2006 by providing tax relief with a one point GST reduction but took much of it away by raising personal income taxes. A series of micro tax cuts in the 2006 and 2007 budgets – such as tax credits for regular transit riders or for tradesmen that purchased tools – benefited some, but certainly not all taxpayers. Then came the decision in October 2006 to reverse its guarantee not to tax income trusts. Although it was the correct policy prescription, it nonetheless hurt the government's standing among investors – anger that was somewhat dampened by allowing seniors to split pension income for tax purposes.

Finance Minister Jim Flaherty finally found the right track in the fall of 2007. His mini-budget eschewed boutique tax cuts and delivered significant broad-based tax relief. The GST was reduced along with business and personal income taxes.

Each one-point reduction leaves $6-billion in the hands of consumers. The Tories have chopped the hated tax by two points and transferred $12-billion a year to consumers, fulfilling a marquee campaign promise. The minister also reversed his income tax increase of 2006 by lowering the first tax bracket back to 15%. This was an acknowledgement from Mr. Flaherty that it was a mistake to raise this tax in the first place. The government reserved his boldest policy with a 32% cut to the corporate tax. The rate will tumble to 15% in 2012 down from 22.12% in 2007. The reduction will help Canada's competitive position and help ensure more good jobs are created here.

Finally, the 2008 budget included a novel tax-free savings plan. Beginning this January Canadians will be able to invest up to $5,000 of after-tax income each year. Future investment gains will not be subject to tax nor will earnings trigger clawbacks on government entitlement programs that are income-tested. This new tax-free savings account is pro-growth policy that will encourage Canadians to save, rewarding individuals and benefiting the entire economy.

Government spending, however, is another story. Voters were initially assured a Conservative government would be fiscally responsible. They have instead been reckless by embarking on a spending binge that hamstrings their ability to lower personal income taxes and reduce debt in the future. They have even managed to best Liberal Paul Martin's spending levels.

While in office, Mr. Martin grew Ottawa by 14% over two years. The first two Conservative budgets increased the size of the federal government by 14.8%. This makes the Conservatives even bigger spenders. While the 2008 budget promised to moderate spending growth to 3.4% this fiscal year, it seems bribing voters with their own money remains a higher calling. The department of finance reported last month that expenditure receipts swelled an eye-popping 8.4% in the first three months of the year. This is two-and-a-half times the 2008 budget plan.

Although they continue to claim they will hit their 3.4% expenditure target, the Conservatives have proven throughout their term in office that they cannot control spending. Consider the government's first budget. It called for Ottawa's expenditures to grow by 5.4% in fiscal 2006/07. At the end of that year government receipts had jumped by 7.5%. The 2007 budget plan announced an additional 5.6% spending hike. The real amount in 2007/08 was a 6.9% increase. So much for responsible budgeting.

Mr. Harper is likely going to win this election on the weakness of the opposition. Yet, the governing party is squandering an opportunity to further advance our position in the world. A lower taxed, better governed country than other G7 nations, including the U.S., would be a magnet for investment and skilled workers. For that to happen Ottawa will need to control expenditures and cut personal income taxes, which remain the highest of all G7 nations.

It remains to be seen whether Mr. Harper will be a transformative leader that keeps Canada out in front on the road to growth and prosperity or if he instead reverses course and ushers in a new era of big government. Canada's standing could easily fall.

If this seems preposterous consider how George W. Bush grew spending at twice the growth rate of his predecessor, blew the surplus and ballooned Washington's budget deficit. U.S. government spending has already increased by 59% this decade. That is an annual average of 8.4%. Over the same period Ottawa increased its expenditures by 54%. That is a yearly growth rate of 7.7%. If Mr. Bush’s fiscal diet consists of a supersized Big Mac, fries and a Coke, Canada is similarly gorging itself only downing it with a diet Coke. If Prime Minister Harper is to preserve our country’s fiscal advantage over G7 nations, he’ll need to trim spending the day after the election is over. Based on his record today, the likelihood of that happening is not promising.

John Williamson is federal director of the Canadian Taxpayers Federation. He will be leaving the watchdog organization today to undertake graduate studies at the London School of Economics.