Scorched earth taxation
During the last days of the previous NDP government, I had a conversation with our local MLAs and asked, naively, why they didn’t drop the PST prior to the election. It would have put the incoming Liberal government in the awkward position of having to undo a tax cut or drive the government deeper into debt when the Personal Income Tax reductions were implemented.
I was told governments do not engage in “scorched earth” tactics.
It is incumbent upon the Minister of Finance to ensure major policy changes are not made during the final days of a government.
This has been the practice in our parliamentary system for as long as it has been around.
After all, governments don’t last forever. At some point, the NDP would be back in power and retaliation could leave the new government in fiscal trouble. It is more than just “gentlemanly behavior.”
It is a matter of self-preservation. (The same is true in ministries outside of finance where governments don’t make major decisions which will handcuff the next government.)
But what happens when the prime minister and his party are fundamentally committed to Libertarian ideals? The notion that governments govern best when they govern least. The philosophical belief that government should not be involved in many of the core functions we hold near and dear as Canadians.
Stephen Harper came to power in January 2006 taking over from a Liberal government which had been in power for 13 years and had ruled for a majority of the previous century. Harper and his Conservatives believed in smaller government. The market should be allowed to operate unfettered and free. People should have their money in their pockets to make their own decisions.
That is a bit of a simplification. However, the Conservative government over its nine years in power systematically introduced tax cuts which have significantly altered the fiscal climate of the country. Essentially, their policy was to reduce federal revenue through tax cuts and thus limit government.
Indeed, it is estimated by the Parliamentary Budget Office that the cumulative impact of cuts to personal income tax and the GST introduced by the Conservatives has been roughly a $30 billion dollar decrease in federal revenue annually. Put another way, if the tax cuts had not occurred, the federal government would have $30 billion more to carry out its various functions. Indeed, the present federal government would not need to run a deficit.
In a sense, Harper’s fiscal policy is a very slow scorched earth approach. His government shorted the revenue stream with the view that Canadians would spend their saved taxes and grow the economy. But in the process, he also ran up the largest deficits in Canadian history. Our national debt grew at a rate we haven’t seen since the last time the Conservatives were in power. Future generations will be paying – in one form or another – for Harper’s policies for decades to come.
Put in a business sense, what Harper did was to sell his product at less than cost while borrowing money from the banks to cover the foregone revenue. Any business trying this for any length of time is not going to be in business very long.
Which Harper knew as no one is prime minister forever. At some point, his government was going to be defeated and the new government was going to have to deal with the parched landscape. Enter Justin Trudeau and the Liberal government.
The Liberals can either try to operate government within the confined space defined by the previous government or they can slowly change the tax structure back to its previous levels or they can keep running deficits.
The first option means many of the programs Canadians support and the money for infrastructure will not be available. The revenue stream is simply not enough to do all the things Canadians expect.
Perhaps more critically, the money isn’t there to do anything new without taking from existing programs.
The third option of continually running deficits is a black hole which will eventually lead us to the situation in which the Americans now find themselves. The reasonable approach is the second option which is to slowly change the tax structure back to a point where revenues can support government expenditures.
Except there are an awful lot of Canadians who have gotten used to the extra $40 on the pay stub and do not want to see their taxes increased. A scorched tax-base is a hard thing to fix. It will be interesting to see whether the majority of Canadians support the Liberals in their efforts.