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It’s the GST, stupid


 

Stephen Gordon tries to figure out the federal deficit.

And here we have an explanation for the structural deficit: the cuts to the GST. Each percentage point of the GST generates about $5b-$6b in revenues (the figures above are net of the GST rebate), so the gap between what current revenues are and what they would be if the GST had stayed at 7% is about $10b-$12b – which is also the PBO’s estimate for the structural deficit.


 

It’s the GST, stupid

  1. Who would've thought that cutting taxes and increasing spending would lead to structural deficits?

    • Uh, anyone who's had a pay cut and simultaneous rent increase?

      • Psst Jenn … I'm pretty sure this is a case of bovine rhetorical sarcasm.

        • Well, I knew that, too. But that kind of 'trust us, we're smart enough even though you don't understand' economics is obviously a problem. I thought I'd bring it down to earth, but no disrespect intended to cow's good sarcasm.

  2. You can have an omnipresent nanny state or a less intrusive and smaller government… but whatever you choose you have to pay for it. You can't budget for the latter, and expect to keep the former running.

      • Well, I was more thinking that the outliers would contain all variations within.

        • You may want to consider replacing the "or" with "to" next time then. And some might say that to avoid loaded language being used unfairly, it may want to be "omnipresent nanny state to an impotent minimalist government"

  3. Yes, tax cuts reduce government revenue, well done Stephen and Aaron. Why is it relevant which ones were cut? The Conservative policy was to eliminate the fiscal imbalance by reducing federal revenues. It was either that or continue running "unplanned" surpluses.

    • Many conservatives believe that tax cuts increase government revenue.

      Also: do you believe it is more fiscally prudent to run a $10-12B deficit or an unplanned surplus?

      • Unplanned surplus. But then, I believe the government should also have something called a "reserve" that includes liquid cash assets.

        • Personally I'd rather an unplanned surplus instead of an unplanned deficit that seems to grow at an alarming rate. I'd also rather hear that the surplus was larger than planned than keep finding out the deficit is larger than we are told.

          But hey, that's just me.

      • It's idiotic to talk about surpluses when you are still carrying $500+ billion in accumulated debt.

        • Exactly. Just because the numbers are larger in terms of money, doesn't mean you get to invent new definitions that make the pain go away. I understand the difference between a deficit and the debt, but way too much is made out of it such that the deficit is all we ever hear about which allows us to ignore the debt most of the time.

          • Yes!

            Now if only you could have gotten Liberal politicians to pledge that any surplus would be used to pay down the debt, much like Stephen Harper used it to pay down $40 billion, instead of spending it on year end election brides and goodies.

            I mean, back when Harper was elected the Liberals were screaming for him to spend the money on a national daycare program instead of paying down the debt.

            I wish you had spoken up then and told the Liberals it was a bad idea !

          • Ah, Jesse, thanks. It is nice to finally find someone–anyone–willing to believe that a person on this earth actually would listen to me. Could you talk to my kids, or maybe my employer and co-worker? How about my husband-guy?

    • 1. It does matter which taxes you cut. Taxes impact incentives. Lowering a tax on consumption will probably increase the rate of consumption (which is not actually good for the economy, contrary to the journalistic belief that we live in a "consumer-driven" economy. We live in a productivity-driven economy – the only way for us to collectively get richer is to work longer hours or to get more out of each hour through productivity growth. Productivity growth is spurred on by savings, because saves get invested or lent out to businesses. Similarly, excise taxes may have any number of impacts on particular behaviors.

      2. The fiscal imbalance was just a jargony way of saying Quebec wants more money.

      3. I do agree with your point that there is little utility in running surpluses. The government should shoot for a balanced budget in the long-run. Sometimes there will be a small surplus, sometimes a small deficit. Frankly, even if we have a structural deficit of 10 billion we are sitting pretty. That is less than 1% of GDP. The deficit is not some bugbear – like any issue we need to make tradeoffs. A larger deficit is a downside, but new spending or tax cuts may offset those negative effects. There is a lot of stuff other than debt reduction that has social and economic payoffs. Like any individual, it is not irrational for governments to sometimes take on debt (in fact, because governments can just re-issue bonds indefinitely, it makes more sense for governments to go into debt than it does for people).

      • Running surpluses is legitimate use of taxpayer money if it is going toward debt reduction.

        I don't buy the conservative idea that a surplus is evidence of too much taxation (which you are not making, I acknowledge). Canadians today benefit from the debts of the past and we need to pay hose down.

        • Especially when one considers that money spent paying interest on the debt is a true waste of taxpayers money: it produces nothing of service to the public at large and simply goes right back out the door. Last I heard, that was 21 cents of every dollar taken in. So it strikes me that there's a substantial amount of tax revenue that could be returned to the public if an active effort were maintained to both balance the budget and produce surpluses directly applicable to paying down the debt.

          Especially considering that the party in power both decreased revenues in it's time in power and effectively increased the debt load back up to where it was before the Liberals last took power in the scope of the last year.

      • 1 – There's certainly a debate over which taxes have the worst effects on the economy, but that's irrelevant to whether the GST cut "caused" the structural deficit.
        2 – Yes, but it was based on the argument that the federal government had surpluses while provinces ran deficits to compensate for cuts in federal transfers. The Conservative answer was to lower federal taxes so Quebec could raise its own money.
        3 – These are good points – governing is about more than "fiscal prudence". Frankly, the prospect of a small structural deficit after facing the worst economic crisis since the Great Depression seems more acceptable than annually discovering we could have had either a more activist government or lower taxes.

      • This makes me crazy. Tax cuts increase revenue when tax rates are extremely high–as they were in the past, at an average, AVERAGE! rate of 70% or more. Tax cuts do not increase revenues anymore, because we've lowered the tax rates to more reasonable levels. Or to be more precise, tax cuts now do not increase revenues enough to make up for the revenue loss from cutting the taxes.

        • Right, but some tax cuts raise revenues more than others – which is why so many people criticise the GST cut. Cutting the consumption tax shifts more of the burden onto business and income taxes that arguably stifle productivity. The empirical evidence seems pretty weak on this point, though, so I don't understand why Prof. Gordon and others are so excited about it.

    • The fiscal imbalance had nothing to do with reducing federal revenues. It had to do with the complaint from some provinces, Quebec in particular, that transfer cuts in the 1990s needed to be replenished.

      • And should be because the federal government was running surpluses and had cut the transfer payments to fight a deficit.

        • This does make sense, but cutting the GST did nothing to balance anything.

          • Well, it apparently eliminated the surplus the federal government was running, which was what gave the impression there was an imbalance…

    • Yes, let's unite to eliminate unplanned surpluses. Or maybe we can find them a good home.

      • I'm more than willing to give anyone's unplanned fiscal surpluses a good home.

      • Exactly, there are many good homes for that money – social programs, research support, even the taxpayers' pocket. Remember, the "unplanned" surplus is the money "unexpectedly" left over after paying for government programs and making your planned debt repayments. And it wasn't going to debt reduction, but to last minute spending that had to get out the door before the end of the fiscal year. Not ideal for prudent planning and thorough policy work…

  4. Despite economic evidence to the contrary, the GST cut worked. It worked in the sense that by the end of the '05-'06 campaign, voters identified the Conservative party as the party of lower taxes. It worked in the sense that it helped Conservatives to win.

    • This sounds like a Tom Flanagan-style argument: It doesn't matter if the Conservatives cutting the GST was bad policy (which pretty well every economist and expert told them would lead to problems)… they won the election so all's well that ends well!

      This attitude would be laughable if it wasn't so idiotic and damaging to the Canadian economy. Remember when Conservatives used to be actually fiscally conservative? Like back in the 50s and 60s?

      • That's the thing about populism, it is a lot like a hermit crab, it hitches a ride on whatever it finds suitable and then appropriates it has its own.

        In Canada, we have had a crew of populists who have taken over the ''conservative'' brand… It can't be considered conservative for a minute (none of these last few years could be). Meanwhile, conservatives never knew what hit them!

        • They were hit by grassroot democracy.

          • Looks more like weeds to me.

          • Grassroots democracy: 1. Doing a deal with a party leader to break his written promise (and rewarding him later). 2. Signing up fake members to take over a political party. 3. Flushing its long history of moderate conservatism to make the Party of Pemanent Election Campaigns.

  5. Hah!

    A static growth projection. How laughable.

    Any analysis on what economic effect that GST cuts had ?

    Any analysis on the additional tax revenue that added growth created ?

    Nobody is saying a GST cut pays for itself but the added growth helps defray some of the cost. Therefore this projection is completely wrong.

    The 2% cuts in the GST can NOT be the only cause of the deficit. How about oil dropping from 100$ a barrel to 70$ ?

  6. That's the thing about populism, it is a lot like a hermit crab, it hitches a ride on whatever it finds suitable and then appropriates it has its own.

    In Canada, we have had a crew of populists who have taken over the ''conservative'' brand… It can't be considered conservative for a minute (none of these last few years could be). Meanwhile, conservatives never knew what hit them!

  7. This assumes a counterfactual wherein Paul Martin would not have spent surpluses on say, government spending and tax cuts in say, a surprise budget update, and instead would have devoted every penny of every surplus to debt reduction. Sorry but I just don't see that happening.

    The real story is that Harper failed to control costs.

  8. Minister of Finance, Jim Flaherty on GST and PST cuts:

    "The member opposite again raises the question of reducing the sales tax. I must say that with respect to tax cuts, I agree with Paul Martin. With respect to reducing the GST federally and the RST provincially, I also agree with the federal minister, and we've talked about this. All you get is a short-term hit, quite frankly. You accelerate spending. You pull it ahead by a month or two. It has no long-term positive gain for the economy.

    On this side of the House — and I say this with respect to the member opposite — we're interested in long-term, sustainable economic growth and the creation of permanent jobs in Ontario. That's what grows the economy. That's what helps people. That's what helps retailers in Ontario, not short-term, knee-jerk actions."

  9. Man, if this is what happens when the Conservatives actually keep a campaign promise, then we should thank our lucky stars that they've sold out on everything else that they purported to believe in!

  10. Prof. Gordon and Aaron have confused a coincidence with a relationship. The fact that the GST cut reduces revenue by about as much as a forecasted structural deficit is meaningless. First, the Conservatives were always going to reduce federal revenues in order to address the fiscal imbalance – this is discussed in the Budget document "Restoring Fiscal Balance" (http://www.fin.gc.ca/fedprov/rfb-eng.asp). If the GST hadn't been cut, other taxes would have been cut more.

    Second, unless there is evidence that this structural deficit would have existed without the recession and stimulus spending, the tax cuts are not the cause of the future deficit. I expect the current deficit has more to do with it than any tax cuts.

    • Prior to the recession and the fairweather stimulus spending, Harper had implemented some of the biggest spending growth this side of the 49th… including expanding his use of public money on such prudent expenditures like polling, partisan advertising and provincial grants to Quebec. He had Canada back in the red even before he hid his answer behind a gulp of water. So I'd say you are the confused one…

      • Could be – could you point me to the analysis that said we were in structural deficit before the recession? $10B seems like an awful lot to spend on polling…

  11. So we go from insane overspending to even more wild insane overspending, at the same time as we go from a mild sales tax (7%) to a slightly milder sales tax (5%). And the reason we're in trouble is… the tax cut, natch.

    Take a look at Mr. Gordon's third graph. Revenues and expenses both shooting for the moon, with revenues modestly above expenses the whole time. Then, the text immediately below that graph: "I'm going to set aside the theory that spending increases could have generated a structural deficit. Spending was trending down towards the end of the 2008-09 fiscal year, and the jump in spending since April is on explicitly temporary stimulus projects." Set aside whatever you like, given that wee little plateau in the red line. Can you not see the insanity in all the years prior?

    The federal government has made itself an insatiable beast while the economy somehow managed to oblige it for most of the last decade, even to the point of having a few scraps on the buffet for its creditors. The federal government chooses to go on a short-term (yeah, right) binge, and promises ("no future cuts in spending") to remain an insatiable beast. And as the beast embarks on this bingefest back to the buffet line, we choose to blame the fact that we closed a small portion of the pastry section at the dessert table? It's not the GST, stupid. It's the beast.

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