So­much for Canada’s rev­enue wind­fall

Calgary Herald - - NP - an­drew Coyne

The 2018 fall eco­nomic state­ment be­gins with a puz­zle. Eco­nomic growth, it trum­pets, is strong — the strong­est in the G7 in, er, 2017. Un­em­ploy­ment is at a 40-year low; ca­pac­ity uti­liza­tion is back to pre­re­ces­sion lev­els; prof­its are up; wages are grow­ing faster than they have in eight years.

All this good news has pro­duced a bumper crop of rev­enues to the fed­eral trea­sury: an av­er­age of roughly $5.5-bil­lion more an­nu­ally over the next cou­ple of years than was pro­jected in the spring bud­get. Yet deficits are now pro­jected to be … higher than ex­pected — at $19.6 bil­lion and $18.1 bil­lion, re­spec­tively, about 10 per cent over fore­cast.

What ex­plains this sur­pris­ing re­sult? Sim­ple: as it has done through­out its ten­ure, the Trudeau gov­ern­ment took the rev­enue wind­fall and spent it — ev­ery last dol­lar and then some.

This is what the gov­ern­ment calls “care­fully man­ag­ing deficits over the medium term.” It used to talk about re­duc­ing or even elim­i­nat­ing deficits. Now it seems de­voted to do­ing what­ever it takes to keep them in the $20-bil­lion range, in per­pe­tu­ity.

To be sure, the cur­rent set of pro­jec­tions, like its pre­de­ces­sors, shows deficits de­clin­ing ma­jes­ti­cally in later years. But some­how in the here and now they never do. Once upon a time, this was sup­posed to be ow­ing to a short­fall in rev­enues, the fruit of the Harper gov­ern­ment’s sup­posed ob­ses­sion with aus­ter­ity.

By now this is not even pre­tended. The last Harper bud­get pro­jected rev­enues for the cur­rent fis­cal year at $326.9 bil­lion, enough for a small sur­plus. The lat­est es­ti­mate has them at $328.9 bil­lion — yet the deficit stands at $18.1 bil­lion. Even al­low­ing for a cou­ple of bil­lion dol­lars in ac­count­ing ad­just­ments, it’s clear what is go­ing on. These are deficits of choice, not ne­ces­sity.

The math­e­mat­i­cal ex­pla­na­tion, then, is sim­ple enough. The pol­icy ex­pla­na­tion is harder to come by. If the econ­omy is so strong, why are we still run­ning deficits? The gov­ern­ment spin is that the strong econ­omy is be­cause of the deficits — and there­fore that deficits can­not be re­duced, for fear of weak­en­ing it.

You un­der­stand. We must run deficits in bad times, to bring on the good times, and we must run deficits in good times, to avoid a re­turn to the bad times. This is how you get $20-bil­lion deficits as far as the eye can see.

Which would be tol­er­a­ble, were we not in the tenth year of an ex­pan­sion — at the very height, as that vol­ley of data off the top was meant to show, of the busi­ness cy­cle. If we as­sume no fu­ture re­ces­sions ever, no prob­lem. But fac­tor in the grow­ing num­ber of threats to the ex­pan­sion — bal­loon­ing U.S. deficits, ris­ing in­ter­est rates, a gath­er­ing U.S.-China trade war, the chaos over Brexit — and the folly be­comes ap­par­ent. De­mand stim­u­lus is all very well in bad times; oth­er­wise, govern­ments should make fis­cal hay while the sun shines.

The news is a lit­tle bet­ter on the sup­ply side. The gov­ern­ment has at last no­ticed the threat to Canada’s com­pet­i­tive po­si­tion posed by the De­cem­ber 2017 U.S. tax re­forms, with their deep cuts in cor­po­rate tax rates. By no­ticed, how­ever, I do not mean to say they have ad­e­quately re­sponded.

Not so long ago, Canada’s cor­po­rate tax rate, fed­eral and pro­vin­cial com­bined, was roughly half the com­pa­ra­ble Amer­i­can rate: a mar­ginal ef­fec­tive tax rate (METR) of 17.5 per cent to their 35 per cent. To­day, thanks to both U.S. tax cuts and Cana­dian tax in­creases, it is slightly higher: 21 per cent to 19 per cent.

Many econ­o­mists and busi­ness groups have urged the gov­ern­ment to seize the op­por­tu­nity for broad-based tax re­form: coun­ter­ing the U.S. rate cuts would not ex­pand the deficit, as it has done in the U.S., if it were ac­com­pa­nied by a clos­ing of costly and in­ef­fi­cient tax pref­er­ences. As a sec­ond best, many rec­om­mended some ver­sion of the U.S. tax bill’s im­me­di­ate ex­pens­ing of busi­ness in­vest­ment.

What, in fact, did the fi­nance min­is­ter pro­duce? 100 per cent write-offs in the first year, four times faster than cur­rent de­pre­ci­a­tion sched­ules, for some types of in­vest­ments in some sec­tors — only ma­chin­ery and equip­ment, and only for man­u­fac­tur­ers and clean en­ergy pro­duc­ers. The rest of the econ­omy gets a less dra­matic ac­cel­er­a­tion of dep­re­ca­tion rates, al­beit ap­plied to a broader range of as­sets.

The re­sult: the ex­ist­ing dis­par­ity in the rates ap­plied to dif­fer­ent in­dus­tries and dif­fer­ent in­vest­ments is, if any­thing, widened — the very op­po­site of what tax re­form should be about.

Still, at least this is some­where in the right neigh­bour­hood. Like­wise, the state­ment talks the right lan­guage on trade, for­eign and do­mes­tic: Ex­pand­ing Canada’s al­ready im­pres­sive net­work of in­ter­na­tional trade agree­ments and re­duc­ing bar­ri­ers to in­ter­provin­cial trade will help to off­set some of the loss of com­pet­i­tive­ness on the tax side. Cer­tainly it holds much greater po­ten­tial than the in­dus­trial pol­icy busy­work that so fas­ci­nates this gov­ern­ment: the “five pil­lars,” six Eco­nomic Strat­egy Ta­bles, tech­nol­ogy adop­tion cen­tres and so on, none of which will make a dime’s worth of dif­fer­ence.

But there’s a no­table lack of de­tail: recita­tions of past ac­tions, more than an­nounce­ments of fu­ture steps. For ex­am­ple, the state­ment ring­ingly “reaf­firms the fed­eral gov­ern­ment’s com­mit­ment to strength­en­ing free trade within Canada.” This turns out to mean “work­ing with pro­vin­cial and ter­ri­to­rial part­ners to ac­cel­er­ate ac­tion” on a hand­ful of files. This would be a more im­pres­sive pledge if there were any vis­i­ble ac­tion to ac­cel­er­ate.

“Work­ing with the pro­vin­cial and ter­ri­to­rial part­ners” is ex­actly how we got into this mess — with a Cana­dian Free Trade Agree­ment, the lat­est of sev­eral failed ini­tia­tives, with more pages of ex­cep­tions than in­clu­sions. What’s needed is fed­eral lead­er­ship: leg­is­la­tion un­der the trade and com­merce power to es­tab­lish a true and en­force­able eco­nomic union, as is the case in self-re­spect­ing fed­er­a­tions.

Oh, but you’re won­der­ing about that pack­age of juicy tax cred­its for the news in­dus­try, tucked in­side the chap­ter on “Con­tin­ued Progress for the Mid­dle Class” with lit­tle ad­vance fan­fare. That de­serves a col­umn of its own.


Prime Min­is­ter Justin Trudeau shakes hands with Fi­nance Min­is­ter Bill Morneau on Wed­nes­day fol­low­ing the fis­cal eco­nomic up­date in the House of Com­mons, which fea­tured tax changes to en­cour­age busi­ness in­vest­ment.


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