In the 2014 budget, the government forecast that the deficit would be eliminated in 2015-16 and this would be followed by modest surpluses over the next three years. The Harper government had already promised to use the surpluses to allow income splitting for tax purposes for families with children under the age of 18; to extend the fitness tax credit to adults; and, to reduce debt by $3 billion a year. These three initiatives alone, if adopted, would use up most of the surpluses over the medium term.

The Opposition parties have remained rather silent on how they would use the surpluses, although both are claiming that they will target their policies at the “middle class”, somehow defined.  All three Parties are committed to maintaining a balanced budget and to not raising personal income taxes and the GST.


A major part of the 2015 election will likely be fought over which political party can provide income tax cuts that will appeal to most Canadians. But why do Canadians want, or need, a tax cut? They want a tax cut because they believe taxes (federal, provincial, and municipal) are too high, and they have lost trust in their governments to use the tax revenues they already have in an efficient, effective and fair way. Simply put, they have lost faith in their governments and who can blame them?


The record of spending scandals at the federal, provincial, and municipal levels over the use of taxpayer money grows by the day. It is easy to understand the growing cynicism of Canadians over the size and role of government. It is easy to understand why a significant and growing number of Canadians are willing to accept the conservative ideology that the solution to these problems is to “starve” governments of revenues so they are unable to spend money wastefully and in doing so reduce the size and role of government in the economy. This is a resurrection of the old “neo-liberalism” view that small government is good government. It is a view that the Harper government has been promoting since 2006.


However, the people who complain about high taxes are the same people who complain about the lack of adequate public services and programs, but they seem unable to make the connection between their availability and the taxes they pay. These public services are just supposed to appear “miraculously” without any cost to the taxpayer.


What is strange is that, in the 2011 federal election, all three political parties rushed to the neo-liberal view that small government is good government. This was not the case in Canada in the 1970s, 1980s, 1990s, and the early years of the 21st. Century. At the federal level, spending and revenues rose steadily as a share of GDP. Both Progressive Conservative and Liberal governments believed that government had a role to play in influencing the economic and social development of the economy.


Unfortunately, they chose to finance the expansion of government primarily through debt financing, and the debt burden rose to crisis levels. But the solution to the fiscal crisis that finally emerged in 1995, through major cuts to government spending, was never an ideological commitment to smaller government. It was simply a practical matter of necessity, required to create a sustainable fiscal structure that would allow the government to embark on a new and ambitious program of economic and social spending, once the deficit was eliminated.


All that came to a halt in 2006. The new Harper government set about dismantling the federal government by cutting taxes and forcing spending cuts to programs and services. After the 2008-2009 recession, the government became fixated solely on eliminating the deficit.


Why should cutting taxes be a public policy priority in 2015? Why should there be a continued diminution in the size and role of the federal government. Can the social and economic needs of the country be met without the federal government playing a key role? These questions need to be addressed during the election.


Canadians feel they are over taxed and they feel they deserve a tax cut.  Frank Graves in a recent article “Canadian Public Opinion On Taxes” contained in the book “Tax is Not a Four Letter Word” (Himelfarb and Himelfarb; eds. 2012) observed that 59% of Canadians feel that consumption taxes (e.g., the HST) are too high and almost 50% think personal income taxes are too high.


The reality is, however, that compared to 15 or 20 years ago federal taxes have come down significantly.  At the federal level, revenues as a share of GDP have fallen dramatically because of the income tax cuts introduced by both the Chretien government in 2000 and the cuts to the GST introduced by the Harper government in 2006 and 2007. Businesses also face a lower tax burden than they did 20 years ago. The legislated corporate tax rate today is 15 per cent today compared to 22.5 per cent in 1999. Of course, many people working today are not aware of this because they were not in the labor force 20 years ago.


In the survey study, Graves posed a question in the following way: “The federal government faces major challenges in dealing with its finances. The country also has major ongoing investment needs. Which of the following 3 priorities should be the most important principle for dealing with these challenges?” Interestingly, the results showed that 63% of respondents favored investing in social areas such as health, education, and jobs; 20% favored keeping the deficit as low as possible; and, only 17% favored keeping taxes as low as possible.


Graves concludes, “The seemingly widespread perception of a huge and growing desire for tax cutting among Canadians…is only partially true at best. They say “yes” to tax cuts over tax increases, and “yes” to tax increases for investments”.


These results might suggest that cutting federal income taxes should not be a priority in the use of the surplus in 2015. However, Graves cautions, that this conclusion may not be justified. After all, according to Graves, “The study of public opinion on taxes is one of the most frustrating and confusing areas for the analysis of public attitudes”.  He warns that there is “gap between what Canadians say and how they vote”; “Simply put taxes, do better on surveys than they seem to do in politics”.


But politicians have always known that. That is why in the 2015 election we will see two commitments when it comes to taxes. First, there will be a commitment to reduce income taxes. In our view, accepting this reality, any income tax cuts should meet two tests; first, they should help strengthen underlying economic growth; and second, they should improve the progressivity of the income tax system. Income tax changes that do not meet at least one of these tests should not be implemented.


Secondly, we will not see any increases in the GST, even if Canadians appear to be willing to accept increases provided the revenues are invested in social areas such as health, education, and jobs. No political party will run an election campaign on increasing the GST to fund needed social and economic infrastructure investments.


As Himilfarb observes, “It has now become a political truism that any politician would have to be nuts to propose tax increases to Canadians.”  He concludes, “Generally, we continue to reward politicians who avoid the issues, or who promise more cuts”.


If this is the political conundrum we are in then we have a serious problem. If increases in taxes are off the table politically, at least for the foreseeable future, then how can any federal government pay for the much-needed investments in public infrastructure that are needed to increase productivity and strengthen underlying productivity growth? These infrastructure investments cannot continue to be neglected. Is there an alternative to tax increases?


The answer is simple, but also politically “challenging”– through Debt Financing. It is politically challenging because Canadians seem to have bought into the neo-liberal view, and the Harper government’s view, that all government debt is bad. This is a view that is complete nonsense in economic theory and in economic reality.


Under current government projections, the federal debt to GDP ratio will fall to 25 per cent, the government’s target, by 2021-22, if not earlier. In the current circumstances and for the foreseeable future, there is no need to go any lower. As the government has said repeatedly, the federal fiscal structure is the best in the G-7 and it is time to use that to our advantage. The 10-year bond rate is just below 2 percent and the 30-year bond rate is below 5 per cent.


Even Finance Minister Joe Oliver believes there could not be a better time to borrow. On Monday he announced that the Government successfully issued $1.5 billion in 50-year bonds. According to the Minister ““In the current environment, it is both advantageous and prudent for our Government to lock in additional long-term funding. This 50-year bond will help us meet our goal of raising stable and low-cost funding to meet Canada’s financial needs and best serve taxpayers.” Although this new borrowing will be used to replace existing short-term borrowing there is absolutely no reason why such borrowing could not also be used to finance infrastructure investments.


The government should establish an “Infrastructure Borrowing Fund for the 21st Century” in which it would borrow to fund economic and social infrastructure that would last well into the 21st century. This fund would not be allowed to grow faster than the underlying rate of nominal growth rate of the economy (e.g., 4%) and, as a result, the ratio of “infrastructure debt-to-GDP” could be held constant. Projects that could be funded by borrowing would be defined in legislation so that the infrastructure fund could not be “abused”.


All other government spending (spending on operations) would be financed by taxes and the government would be committed to maintaining a long-run sustainable fiscal structure defined as a low and stable debt-to-GDP ratio (25%). Any increase in non-infrastructure spending would have to be financed by higher taxes and/or lower spending.


At the federal level further spending cuts are probably not a viable option. As a share of GDP, spending on government operations is at it lowest level ever. Taxes will have to go up to fund any increase in government operations, although this could be achieved through a small increase in the GST (one point would yield $7 billion annually).


Some people take the view that all government debt is bad, even borrowing to finance the long-run social and economic infrastructure needs of the country. This is the view of the Harper government and this view is simply wrong. Investments in infrastructure that yield a social rate of return in excess of the cost of capital should be undertaken. Canada was built on this principle in the 19th Century and it still applies today. All economies work on this principle and the federal government with its sustainable fiscal structure, established over the last 15 years, should begin implementing it.


The longer these infrastructure investments are put off, the greater the loss in economic activity today and the greater the cost to future generations

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