Even Tories shouldn’t want tax cuts
A Conservative leadership race just wouldn’t be Conservative if it didn’t include a clarion call for lower taxes and a balanced budget.
In normal times, it would make sense that leadership contender Erin O’Toole is pledging to deliver both of those, and his main competitor Peter MacKay is hinting at the same as they vie to replace Andrew Scheer as the leader of the official Opposition.
But these are not normal times, and even conservative orthodoxy deserves to be put under the microscope during a time of deep economic crisis, huge deficits, unforeseen holes in the social safety net and disproportionate pain for the most vulnerable.
Now is just not the time, even from a conservative vantage point, to be turning to tax cuts as a way to spur growth and free up the private sector in the hopes of prosperity, as O’Toole argues.
Tax cuts promised during a time of big deficits are not true tax cuts because politicians who promise them are just kicking the can down the road, says Jason Clemens who heads up the conservative Fraser Institute. A deficit-busting government will eventually have to ask taxpayers to cough up more.
“People are smart,” he says. “They understand they’re not getting a tax cut, they’re getting a tax deferral.”
Of course, this being a leadership campaign and not an election campaign, neither O’Toole nor MacKay are precise about when they would balance the budget, when they would cut taxes or which taxes they would cut.
O’Toole released his platform this week, and set out the gist of his approach to fiscal policy.
Taxes are too high, he says, and they should come down. An O’Toole government would also simplify the tax code and “flatten” the tax brackets between income groups. He’d start his lower tax regime with cuts for small business.
At the same time, he’d be eliminating the deficit — no small task given that the federal spending this year is running around $300 billion in the red. While O’Toole doesn’t give a precise plan for the deficit, he says he is inspired by Stephen Harper after the global financial crisis of 2008-09. Back then, Harper ran up infrastructure spending to boost the economy, but then withdrew the measures as soon as he saw signs of growth. He gradually whittled away most of the deficit over the next few years, through a tight grip on new spending and a reduction in operating costs.
But Canada’s economy is in a much deeper hole now than it was back then, and the resulting deficit is many times larger. Still, O’Toole’s spokesperson confirmed he would cut both taxes and the deficit at the same time, mainly because he believes that tax cuts spur strong economic growth, which in turn will help reduce the deficit through generating higher tax revenues for the government.
MacKay hasn’t released a full platform yet, but his “jobs plan” vows to eventually balance the books and reform the tax system so that it encourages investment, growth and job creation.
He too has his eye on Harper’s approach to postcrisis deficit control, his team says.
But the best model to follow, according to Clemens, is actually the one set out by Liberal prime minister Jean Chrétien and his then-finance minister, Paul Martin. They clamped down on spending first and only then moved to cut taxes — all while communicating their timelines very clearly so the public could brace for what came next.
A conservative approach to fiscal policy would do well to follow that pattern.
“We need Chrétien 2.0,” Clemens says. Only once a balanced budget is in sight should a government start cutting taxes. And given the depth of the current crisis, as well as the long after-effects that will put pressure on government support for many more months, a balanced budget is a long, long way off — even under a tight-fisted leader.
“There’s no time in the next decade that we’re getting to a balanced budget,” Clemens says.
Tax specialist Jack Mintz of the University of Calgary, another mainstay for fans of conservative fiscal policy, generally agrees that cutting taxes while trying to balance the budget is misguided exercise. But he also says there’s room to fiddle with the country’s tax structure, as long as a government broadens its tax base at the same time, and keeps tax revenues flowing into government coffers.
A government could, for example, get rid of some deductions and exemptions or impose a digital tax, and then use the extra revenue to cut taxes elsewhere. But the hope among some conservatives that tax cuts pay for themselves by generating near-term growth is hard to prove except in extreme cases, economists say.
The bottom line? Any leader who proposes major tax cuts while also balancing the budget is implying deep cuts to government spending at a time when that spending is central to the stability of the country, and essential for wherewithal of the most vulnerable people in Canada.
Does the Conservative party really want to go there?