A Brief Comparison of Recent Records
Such a claim scarcely seems credible when one bears in mind that when the Conservatives took office in 2006, there had been federal budget surpluses for seven or eight years. This positive fiscal record was largely as a result of Paul Martin’s successful efforts – “come hell or high water” – to get rid of the progressively larger annual budget deficits inherited from the previous Conservative administration. Martin also established a $3 billion a year “rainy day fund” for contingencies as a further means of avoiding a return to deficit budgets. The Conservatives dispensed with the annual rainy day fund (recently restored) and reduced the GST (now HST) by two points, against the advice of almost all economists. The combination of lost revenues (from the GST cuts) and increased government spending during their first couple of years in office brought a return to annual budget deficits. The Conservatives were slow to anticipate the impending world-wide fiscal and economic collapse of 2008. Their belated response of stimulus spending measures, while appropriate, added to the budget deficits.
To bring the budget into balance one must increase revenues, decrease expenditures, or some combination of both. The anticipated revenue flow has not materialized, largely because of the collapse in the price of oil. As a result the government has relied instead on substantial cuts in government spending but it has been difficult to determine exactly where these cuts have occurred or to what effect. The Parliamentary Budget Office (PBO), established by the Conservatives to provide independent analysis on the state of the nation’s finances, has been repeatedly thwarted in its efforts to obtain information from the government that would allow it to carry out its mandate. However, there have been sufficient complaints to demonstrate that the treatment of veterans has suffered because of cutbacks in National Defence. There are also reports that more than $100 million in economic development funds have been held back as part of the efforts to restrain expenditures and balance the budget.
Quite apart from the (potentially harmful) reduction in services when expenditures are cut, there is no inherent virtue in balancing the budget without regard to the existing condition of the economy. Given the present economic upheaval caused by the relative collapse of oil exploration in Western Canada, a good case could be made for increasing spending on infrastructure to stimulate growth and job creation.
The Underlying Budget Strategy
While attention has been focused on whether the government will achieve its balanced budget and how much services will be cut in the effort to reach this target, there is an underlying story of greater significance that merits our attention. It seems clear that there has been a Conservative strategy to reduce tax revenues to the point that there is very little capacity for any future government to introduce new programs.
In addition to the reduction in the GST/HST, the government has introduced a variety of “boutique taxes” designed to appease particular voting groups through tax credits or deductions. Examples include the Child Fitness Tax Credit, Public Transit Credit, and University Textbook Amount. The government has also reduced its potential revenues by introducing income splitting for families with children and it has promised to double contributions to Tax Free Savings Accounts (TFSAs). Quite apart from the fact that these two latter measures disproportionately benefit high income Canadians, they also they deprive governments of revenues that would otherwise have accrued. Rhys Kesselman, a Professor at Simon Fraser University and co-author of the research that led to the original TFSA, contends that even the existing TFSA provisions (without the doubling of contributions) will deprive both federal and provincial levels of many billions in revenue over the coming decades, leaving governments hard-pressed to cover existing program costs.
Will We Tie Our Hands?
Taking no chances on the outcome of the next federal election, the Conservatives have used the cuts in taxes and spending to tie the hands of any subsequent government. The financial commitments that have already been introduced will make it almost impossible for a new government to introduce major programs except by increasing taxes – a daunting proposition given the prevailing anti-tax sentiment. Those who automatically respond with anger to any proposed tax increase will need to broaden their perspective. Unless they want to be complicit in the perpetuation of a permanently shrunken federal government, fiscally constrained from taking a leadership role in the challenges that will arise in the years ahead, Canadian citizens will have to be prepared at least to consider the merits of tax increases that may from time to time be proposed. Unless they do, the “I Shrunk the Budget” strategy will prevail, whether appropriate for changing times or not.