Are taxes the only way out of the deficit?

ANDREW COYNE: The government has a choice. It can either break its promise not to raise taxes. Or it can break its promise not to cut transfers.

We’ll pay for this one way or another
The Great and the Good have come down from on high, and delivered their decree: there shall be tax hikes. The deficit that was once our friend is now our enemy, no longer “stimulative” but “structural.” The spending spree that gave us that deficit cannot be reversed, or not altogether. If the deficit is to be slain, it must therefore be by raising taxes. Thus sayeth the elders, including former Bank of Canada governor David Dodge, two former deputy ministers of finance, and Jeffrey Simpson.

Well, maybe. What is certainly true is that the fiscal forecast, once an unbroken line of surpluses as far as the eye could see, has darkened considerably. Not only is the deficit headed for $56 billion this fiscal year, but it will still exceed $11 billion even four years from now. And that’s on the government’s cheery numbers. The parliamentary budget officer forecasts the 2014 deficit at $19 billion—after four years of (assumed) steady economic growth. Just in time for the next recession to blow it sky-high again.


So clearly we have a problem on our hands. But is it true that fresh taxes are the only remedy? Are government ministers—and, to be fair, the Opposition leader—dissembling when they claim to be able to balance the budget without such harsh measures? Are they, as the Great and the Good suggest, failing the test of leadership? Should that be the new red badge of courage—a politician’s willingness to raise taxes?

It’s worth remembering, by way of answer, how we got here. The G and G like to cite the effect of the Conservatives’ cut of two percentage points off the GST, and certainly that was and remains a costly blunder. If taxes were to be cut, far better to cut income taxes, which the Tories have barely touched. (On the plus side, it may have made it easier for Ontario and B.C. to contemplate harmonizing their own sales taxes with the GST.)

But with or without the GST cut, we’d still be in surplus—yes, even today—had the last two governments shown the slightest discipline in spending. Had the Liberals, after 2000, held spending growth to a rate sufficient to cover increases in population and inflation—that is, had they held spending constant in real per capita terms—they would have left the Tories with a budget of $148 billion in fiscal 2006, instead of the $175 billion it turned out to be. Had the Tories done the same, we’d be spending $169 billion in the current fiscal year—not $242 billion. In other words, the federal government is today spending nearly 50 per cent more real dollars per citizen than it did a decade ago. That’s why we’re in this mess.

Well, water under the bridge, you may say. They’ve spent the money, and now we’re stuck with the bill. But the good news is that even today, even after the explosive growth in spending of the last 10 years, we can still balance the budget by 2014, without raising taxes. The bad news—well, we’ll get to the bad news in a minute.

The government’s September fiscal statement shows annual revenues growing by nearly a third between now and then, from $217 billion to $285 billion: roughly seven per cent per year. Assume that’s overly optimistic, and pencil in $276 billion in revenues for fiscal 2014 instead. To balance the budget in that year, assuming interest costs of $42 billion, will mean holding program spending to $234 billion.

That sounds tough. It’s roughly $20 billion less than the government currently projects. But it’s still about $28 billion more than it spent last year, before the massive “stimulus” binge. As it happens, that works out to holding government spending level, adjusting for population and inflation growth: not using 2000 as the benchmark, as I did before, but 2009. That doesn’t sound impossible.


Or it wouldn’t, had not the government added two further conditions to its “no tax hikes” pledge: that it would make no cuts in transfers to provinces, or to persons (notably old age pensions and employment insurance). But these make up more than half the budget, and are slated to grow by 13.6 per cent over the next four years. To keep overall spending to our targeted $234 billion in 2014 would require cutting the whole $20 billion out of the rest of the budget: about one dollar in six.

Is that possible? Certainly not without a majority government, and probably not even then. So, in the short term, the government has a choice. It can either break its promise not to raise taxes, as the G and G have urged it should do. Or it can break its promise not to cut transfers, as, well, Terry Corcoran has suggested. The one thing it cannot do, if it has any intention of bringing the books back into balance by then, is sit tight, make a few cuts around the edges, and hope for a miracle. Which, of course, is precisely the policy course it is on.

Oh, and the bad news I promised you? Balancing the budget four years from now is the easy part. From here on in, the fiscal choices are only going to get harder. The retirement of the baby boomers over the next several decades will mean astronomic increases in costs, notably for health care, with relatively fewer people of working age to pay them. The C.D. Howe Institute’s Bill Robson estimates this represents a total unfunded liability in excess of $2 trillion.

Raise taxes, or cut spending. You think the debate is fierce now? We have not yet begun to fight.We’ll pay for this one way or another




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Are taxes the only way out of the deficit?

  1. “Oh, and the bad news I promised you? Balancing the budget four years from now is the easy part. From here on in, the fiscal choices are only going to get harder. The retirement of the baby boomers over the next several decades will mean astronomic increases in costs, notably for health care, with relatively fewer people of working age to pay them. The C.D. Howe Institute’s Bill Robson estimates this represents a total unfunded liability in excess of $2 trillion.”

    Doesn’t that mean the answer is not to raise taxes or curtail spending growth. It means we should do both, and run surpluses.

    • Let me just add that the boomers are, at their wealthiest, raiding the treasury and leaving their less numerous children to pay for their party. It’s the nearest thing to theft.

      • From here, it IS theft. Helping yourself to other people's stuff, without their consent.

    • In a benevolent and enlightened dictatorship that might be the case. But we all know what happens when governments are awash in cash….not surprisingly the pressure for them to "do something" becomes enormous. See Alberta when its Trust fund was the thing to do, and even the Liberals in the late 90's. Or better yet, look to the UK, where Labour is the Poster Boy for tax and spend. The problem being if you leave no tax capacity then the inevitable bump in the road leaves you no room to manouver.

      The US, by contrast and I dont advocate this, is an undertaxed society, certainly relative to their obligations. However their ability to pay down its debt is much higher (even at these obscene levels) than the UK's is. All of this to say that the answer is to cut spending where you can. Governments need to be wise about the tasks they take on, as needs are limitless.

  2. Then there is also the debate about how the revenue is raised, consumer versus corporate, how high is the rate on the rich, how many should be left off the tax rolls (or how broad should your tax foundation be), income versus consumption versus wealth.

    But before one complains about the balance between income and consumption (the opening gabit being thank god there was ANY tax cut) you need to size governments limits and priorities and watch what you spend things on.

  3. Interesting approach, but I just checked the budget officer report you cited. Page 4 of the report says that the projected $19B sturctural deficit in 2014 is reached only with a $6.3B per year increase to Employment Insurance taxes Otherwise it would be a $25.3B structural deficit.

    So you'll have to find another $6.3B in savings if you really want to do it without increasing taxes.

    Just a little further to go though.

    • Why not simply return Employment Insurance to it's originally intended purpose (Unemployment Insurance); that of providing 'temporary' financial assistance to those who have 'unexpectedly' lost their job through no fault of their own? Others could then be removed from the feeding frenzy at the public trough.

  4. I believe that the US collects more taxes per capita than Canada, England or Australia (which are the lowest-taxed in the G7/8) once all levels of government are accounted for, but doesn't rely as much on individual income tax as these countries.

    Most fed/prov countries have constitutions which clearly delineate what role is assigned to which part of which government, but the US constitution is relatively vague. There tends to be a lot of overlap & turf wars regarding who provides what services, even within the same level of government, which makes for a lot of inefficiency. They also have a sizable lunatic fringe which makes any sane discussion of taxes & services extremely difficult.

    • Nah. They tax about 30% GDP I think we do about 38%. Those numbers may be off but we are for sure higher including all levels of government and all types of taxes.

  5. I think that it will have to do both.

  6. "The retirement of the baby boomers over the next several decades will mean astronomic increases in costs, notably for health care, with relatively fewer people of working age to pay them."

    Yep, and the new majority of non-white working age people will begin asking themselves why they are subsidizing an overwhelmingly white and largely affluent class of retirees, the same people who left them with a half trillion dollar deficit and who they regard as racist exploiters of third world countries like Haiti, I should add. There *will* be extreme racial tension, to say the least, and that is an absolute certainty. Can't say I sympathize with the boomers, it was their genius idea to import immigrants hostile to them to prop up their house values in the first place.

  7. So instead, no immigration from "non-white" countries should have been the answer, leaving an even larger unfunded liability?

  8. Simply from reading the subtitle there are two other choices: cut things other than transfers or finance the current deficit as cheaply as possible in current dollars, and pay it back at times when current rates of taxation yield higher actual revenue.

  9. Or, it could re-nationalize the Bank of Canada and start creating money, rather than borrowing it from a private bank at interest!

  10. And the game has begun Andrew; the liberals have bet the barn that Stephen Harper's blatant lie will catch up to him BEFORE the next election (and are essentially not doing anything), while conservatives are convinced that they can engineer an election and win a majority with the big lie being exposed AFTER…If you were a betting man Andrew, who would you chose as your horse in this game of 'our-country-is-going-to-hell-in-a-hand-basket'?

  11. Well, we *could* use some of that $18 billion (source: Fraser Institute) that our universally panned immigration policy costs us per year, or we could just tell the baby boomers to make do with less, or we could just seize their homes and pensions to make up the shortfall. And it's not like immigrants are even net contributors to Canada, as evidenced by the fact that 30% of them don't even file income tax "because they don't know how to" (source: FinMin), and that 30% of immigrants eventually leave Canada(source: Min. of Immigration), usually returning to their home countries with the wealth they gained in Canada. Seriously Derek, you should be ashamed to support a scam whereby a large percentage of immigrants don't even bother paying income tax, that is reprehensible.

    The boomers lived well beyond their means for decades and as a matter of intergenerational equity – a human right recognized by the UN – it's only fair that we make them pay their own way or that we take the matter into our own hands. You *do* support human rights, yes? Good.

    Final note: if your argument begins with the word "So", it probably sucks, avoid this at all costs, you're welcome.

    • You really shouldn't trust anything the Fraser Institute says without very thoroughly going through their assumptions. They have a nasty habit of stacking calculations to lead the conclusion they want. Case in point was their talking point about how taxes exceed what Canadians spend on 'necessities'.

    • Sooooooooooooooooooooooo, $18 bill in inefficiencies (according to the FI– how disputable is that?) + er, could you actually give some links instead of saying "FinMin" says 30% of immigrants don't pay taxes? I do actually believe that 30% of immigrants move on elsewhere, maybe because the likes of you are soooooo welcoming n'est-ce pas? "It's not like immigrants are even net contributors to Canada." WTF? Yeah, all those businesses they start and all those shit jobs they do that no one else will so they're children can become neurosurgeons and entrepreneurs are such a drag on the economy eh?

      Dang, I wish I could argue on, but after a lovely b-day dinner for a friend (served by a great immigrant server) and a relaxing ride home (provided by an immigrant driver) I must crash (in the comfort of an immigrant-installed furnace) so good night to you. Sooooooooooo, have a good night.

  12. Hitler and Germany tried that. It led to such rampant inflation that it became cheaper to burn money in your wood stove than wood!

    • I wish people would stop comparing Harper and Hitler!

    • Actually, it was with the Weimar Republic of Germany of the 1920s that rampant hyperinflation occurred.

      Hitler and his cronies didn't get into power and nationalize the Reichsbank until well after hyperinflation was cycled out with a new currency and better policy. Even then, they didn't change much and the economy actually stabilized and improved significantly under them.

      One of the few things you can credit the Nazi's with was relatively sound fiscal management and ending an economic depression, though it could be argued that they were just benefiting from the economic policies of their predecessors finally paying off. Arguably the hyperinflation episode also contributed to the atmosphere of massive unemployment and resentment that the Nazi's used to get into power.

    • That's completely false. We actually had a nationalized central bank (as all countries claiming to respect democracy should) from 1935 to 1974. It was done by Mackenize King to bring us out of the Depression, and allowed us to construct the St. Lawrence Seaway, the Trans-Canada Highway and many other major infrastructure projects, DEBT-FREE WITH NO INTEREST. Then Trudeau sold us out, just like Wilson sold out the Americans in 1913 by creating the Federal Reserve.

      Inflation is the direct (and intended) result of private banks creating money when they make a loan. Money created in this way (i.e. under the burden of interest) necessitates even more loans to make the interest payments on the first loan, thereby devaluing the currency and leading to bubbles that invariably burst with dire consequences (for everyone but the banks).

      Lack of knowledge of ecomonic theory and principles is by far the largest threat to western democracy.

  13. "Economic growth and spending controls is the other way"

    Isn't that how Mulroney took Trudeau's 1.5 Billion dollar deficit and turned it into a 4.3 billion dollar deficit?

    • Typical Liberal revisionist history. Trudeau started the "snowball rolling down hill" . Mulroney was stuck trying to "turn around an off course aircraft carrier". Mulroney was criticized heavily by the Liberals for cutting spending, cutting transfers, changing the MST into the GST, and establishing the FTA. When Chretien assumed govt, he cut spending deeper and faster, cut transfers farther than Mulroney was prepared to go, swam in GST revenue while pledging to abolish it, and enjoyed the tax revenue from the prosperity that the FTA brought, while pledging to negotiate our way out of it also. Then, in typical Liberal hypocrisy, they expanded the FTA into NAFTA, boosted payroll taxes for more revenue, then proceeded to steal money from the taxpayer.

      Now we find them defending the GST that Chretien called a scourge, and railing against Harper's reduction of the rate. The tax they hated and pledged to abolish in two consecutive elections, they now try to make their own,

      The fact is that the deficit was paid down by the tools and the policies of Mulroney. The GST and Free Trade.

      • This is a very good summary. However, please allow that the GST drop from 7% to 5% was poor policy. Promised and delivered, yes, but poor policy.

        • Dropping the GST rate from 7% to 5% is something that Liberals will never understand. It's called living up to a campaign promise. Very different from Chretien's promise to eliminate the GST, or his promise to take the money saved from cancelling the EH101 helicopters and using it for a national daycare program.

          Right now, Ignatieff is saying that he won't raise taxes if elected, when we all know that he will.

      • Thanks for summarizing how the liberals got us out of debt. (even in your own cynical fashion)..why is it that you believe Harper can get us out of his debt now by while doing none of those (liberal) things if that didn't work for your pal Mulroney?…That is what this article is about Fred…think about it now…just take some time and think about it…

  14. Economic growth and spending controls is the other way. It can work. Raising taxes and cutting transfers is exactly what Chretien did, so we know what to expect from a Liberal govt. I would rather have a Conservative govt guide me out of deficit than a Liberal one.

  15. I think you are approaching this all backwards.

    Problem number 1: Health care spending inflation.

    Fix that problem, and the numbers will fall into line.
    Or accept that it is unfixable, tinker around the edges of discretionary spending, and raise taxes. Them be the two options.

  16. The Marshall Savings Plan is talked about here by Diane Francis of the National Post. Scroll down to "Description of the Marshall Plan" 1/2 way down the page if you are in a hurry.

    http://tinyurl.com/dianefrancis

  17. Good god, cut transfer payments, at the very least keep them the same for the next ten years. Of course I'm in Alberta and we get next to nothing from the feds. I'm pretty tired of working hard and having Quebec benefit from my hard work.

  18. Okay, it works everywhere except for this comments section. It's April 29, 2009 by William Watson.

  19. Im in a higher tax bracket and I dont mind paying more. At the end of the day its only fair.

    • You're kidding right.

      • Then again, maybe she just doesn't realize she's commenting on
        a Maclean's blog.

  20. Keith M., those on the receiving end of equalization don't benefit from your work. You pay the same level of federal taxes as someone in Quebec, all other things being equal. You just happen to live in a province that won the geological lottery. YOU, had nothing to do with it. So climb down off your cross.

    • Utterly wrong. Equalization takes tax revenue derived from Alberta and deposits it in Quebec. It's as simple as that. And as for geological lotteries, Quebec benefits mightily from hydro power that doesn't exist in Alberta, and then criticizes Alberta for developing its oil resources — which, btw, don't get developed on their own, without accommodating gov't policies. Resources don't make the nation, it's economic development that creates the resources.

  21. But subsidy payments to, let's say western conservative farmers, do indeed constitute transferring wealth on the backs of individual workers. By all means, eliminate the Dept of Ag.

    • But, oh but …. we have to have somewhere to send hay during their next drought …

  22. Actually balancing the budget might not be as difficult as some suggest if Canadians could be encouraged to think beyond our own front door. As I've written many times, we simply have to separate our 'needs' from our 'wants.' For voters and governments who can't seem to sort this out, the method is rather elementary.
    For the moment, let's overlook the sole method which governments use to gain power; that of buying votes with money they don't have.
    (Continued…)

  23. (Continues from above)
    Instead, every government expenditure should be put to the following test: Does it benefit or have the potential of benefitting ALL Canadians? If the benefits primarily focus on a single region or group, race, culture, livelihood, language, etc., the plan should immediately be disgarded. Rather, our efforts and moneys should be focused on benefitting all Canadians. Examples include education, health, environment, law enforcement, protection of our country, infrastructure, and equality.
    If we could find the 'government will' and the 'Canadian will' to finally take our economic situation seriously, then we could immediately start enjoying real economic improvements.
    Or, we can stay the current course; that of taxing and spending ourselves into oblivion. And, as our previous generation seems to feel (without remorse), we can simply load our current unnecessary excesses and the resulting debt on the shoulders of our children. Is this what we really want?
    Kids, be aware of what the adult society is planning to pass on to you!

  24. The GST cuts are worth, by some estimates, 150,000 or so jobs. If we propose to raise the GST again, let's not overlook parts of the equation.

    But the fundamental problem is really that government spending is overborne and needs to come down. Too many people fail to recognize that the spending level we are attempting to preserve belongs to the high water mark year of an exceptionally prosperous decade-long stretch. We can't reasonably expect to spend everything we can earn in the best years and still pay off what we borrow in the average and below average years to sustain that spending level.

    Spending must be reduced.

  25. It always comes down to raising taxes, doesn't it?

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