In my last post, I took to task Jim Flaherty's assertion that he could get rid of Canada's "net debt" in just 15 years, by the end of Fiscal Year (FY) 2022. I'll talk a bit more about that later in this post. First, I have a major problem with the Harper Government suddenly deciding they're no longer going to respect private sector forecasts about economic growth or contraction, which tends to be more conservative (small "c") than what the bean counters at the Finance Department come up with. From now on, it will be pie in the sky, hope for the best. This is just plain nuts. It's the same thinking the Mulroney Administration used and it's why the debt tripled under his watch.
It is true that the previous Liberal government lowballed expectations, over and over again. But that was actually smart thinking. By coming up with a worst case scenario, the executive branch was able to pay the bills. When surpluses helped pay down the debt, we Canadians got a tax break -- not a big one, but modest enough that we had more money in our pockets.
But let's presume that Flaherty is acting on good faith, and his numbers manage to stick. This includes his projection this year's surplus will be double that forecast -- from $3.6 billion to $7.2 billion once the accounts are closed next year. One would hope they do stick, because we're still the only G-7 country running an annual surplus and drawing down the accumulated deficit -- an advantage the States is far from achieving even if it froze spending at current levels today. Based on Flaherty being totally honest about the numbers, I'll go through some of the highlights of the economic statement -- what I like, what I don't.
- The debt-to-GDP ratio, as we understand the term in its current context, is planned to be reduced to 25 percent by FY 2013, one year ahead of schedule. That's a very good thing. At 25%, we would no longer have to rely on foreign borrowing and could finance the debt solely through Canadian sources. It's possible the government would no longer even have to issue Canada Savings Bonds from that time on. It wouldn't quite put us near Australia whose debt-to-GDP ratio is about 16% right now. (We're at 38.3%, at present.) But self-reliance would be a win-win, both for our economy as well as the viewpoint of foreign investors who park their money only if know they're going to get their money back.
- Surpluses will continue to go to debt retirement, whilst interest savings will go towards tax reductions. Big deal. That's what's happening right now -- the devil is in the details of the tax cuts. They should go towards increasing the basic personal exemption, every year. The marriage penalty should also be eliminated -- I'd do it over five years.
- One reason why the surplus is expected to be higher is because the cap on which EI premiums are charged is going up -- $1,000 to $40,000 of employment income -- even as the premiums drop next year; and they're considered part of general revenues. The cap, frozen for the last ten years, will continue to go up with inflation. In the next couple of years, the CPP and RRQ premiums have to be reset and I expect those to go up as well and while they do go into trust funds (and are therefore "off the books") the contributions are deductible and they'll find ways to negate the value of the increased deduction.
- The government proposes a "working income supplement." I touched on this in a post a little while back, but the idea is simply to give low to middle income Canadians more money in their pocket -- either through a monthly cheque or lower withholding taxes, on a sliding scale until they get over the official "poverty line." This could help rebuff the common criticism that tax cuts usually help the more well off. If it gets people off of welfare and back to work and paying taxes, that would be great. The best social program is a job, after all. But if the money amounts to peanuts, then those on social assistance might think they're better off staying there. We won't find out more about this until May -- and that's another thing; we're kind of used to hearing the budget before the start of the fiscal year.
- Reducing the GST by another percent: A giveaway to the rich. Don't even think about it until after debt-to-GDP gets below 25%, which would push it back to 2013 or 2014.
- Cutting the capital gains tax further: Why? They're already below the rates in most of the G-7. It's true more people than ever play the market, but giving wealthier Canadians even more money defeats the purpose of a progressive taxation system which is to redistribute income from richer people to the less well off.
As I mentioned yesterday, the idea of "net debt" is a joke. It's so harebrained it could have came out of Termite Terrace, the Warner Brothers unit where all the Looney Tunes were produced. As the government says in its own papers, net debt includes provincial and territorial debts and unfunded public service pension liabilities, as well as the surpluses in trust accounts such as the CPP and RRQ. Since the public pension plans are doing extremely well as of late -- thanks to mostly prudent investment decisions by the CPP Investment Board and the Caisse de dépôt et placement du Québec, respectively, not to mention an unfunded surplus in EI of about $35 billion, net debt is probably much less than the official figure of 38%. But it's not comparing apples to apples, but apples to oranges.
It's stupid math. It's crooked math. And any accountant would shoot down the concept -- as I hope the Auditor General, Sheila Fraser, will.
What would I do differently is to say that each year Canada commits to reducing its debt-to-GDP ratio by a minimum of one percentage point per year. This is easily achievable -- we've averaged a reduction of about 4.1% per year over the last eight years. (On this count, John McCallum has no right to be as sanctimonious as he was yesterday -- claiming it'll take 161 years to pay off the debt. After all, he's famous for helping to orchestrate the "inverted surplus" -- when the Liberals predicted it would be $1.9 billion in FY 2004, and wound up as being actually $9.1 billion.) But by setting a target of one percent, we allow for recessions and set a more realistic goal of paying off the debt -- the federal accumulated deficit, not "net debt" -- in 38 years. Being totally debt free, however, would make Canada the envy of the world, especially the Americans -- among other things it would allow for a 20% tax cut, right across the board.
I really look forward to the day when we pay less taxes than the Americans. I really do.
One other point: Unless I missed something, there was absolutely nothing about fixing the fiscal imbalance between the national government and the 13 jurisdictions that make up the Canadian federation. This needs addressing as well -- except for Alberta, there are bills that have to paid, and the provinces and territories all bear the brunt of health care costs. People went ballistic a few years back over the infamous "Alberta firewall" letter that Stephen Harper co-signed, but it's gotten to the point where maybe Ontario should be considering withdrawing from the Canada Pension Plan, the maternity benefits portion of EI and collecting its own income taxes -- things which Québec all does for itself already.
The mere threat of losing all that money might be the wakeup call Harper needs to fix equalization for the next generation. It's way past time for the have-not provinces to be lifted out of their quagmires and into the kind of prosperity that people in Ontario and Alberta are accustomed to -- and British Columbia used to be.
Overall grade: C+. It would have been B-, but for Flaherty's new math.
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