What the party leaders just won’t say - Macleans.ca

What the party leaders just won’t say

Andrew Coyne on why it’s madness to ignore the fact that the boomers are about to retire

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What the leaders just won't say

Sean Kilpatrick/CP

Back and forth rolls the popular wisdom. There are no real differences between the Liberals and Conservatives! It’s an empty, issueless election that will change nothing! No, the differences between them are stark! It’s a clash between two fundamentally different visions!

Perhaps, when the waters have settled, we will conclude: there are small but significant differences between the parties. There are policy issues in this campaign, even if we in the media are doing our traditional stellar job of ignoring them. True, the government of Canada would continue to do almost all of the same things it does now, at much the same cost, no matter which party is elected—at least for the next few years. But where the parties do disagree, there are clear differences in direction signalled, and over time these could grow to be large indeed.

And there’s a wild card—with a minority government looking increasingly probable, the policies of the other parties, notably the NDP, take on rather greater significance than they might otherwise, as potential bargaining chips in any post-election haggling over power. So the main parties’ platforms must be assessed in light of the gravitational pull likely to be exercised upon them by these lesser stars.

The broad facts are these. Over the next four years, the recent budget proposed to spend roughly $250 billion a year. The Tory platform proposes to cut some of that spending—$1 billion the first year, rising to $4 billion in the fourth—but would add back a few hundred million annually in new spending, most of it in the form of tax credits. The Liberals invert that: they’d spend about $5.5 billion more annually (as of year two: the Liberal plan does not extend out beyond that), mostly for social benefits, and cut about $800 million from other spending. In other words, the two parties are both promising to spend about as much as the budget, plus or minus one or two per cent.

Of course, that’s assuming either of them stick to the track they’ve laid out. Neither party has spelled out where they would find the promised savings, a deficiency that would seem particularly glaring on the Tories’ part, given that they are promising to find eight times as much as the Liberals. And even to follow the budget path will require the closest thing to fiscal discipline Ottawa has seen in some years: a cut, in real (inflation-adjusted) terms, of roughly 12 per cent per capita. There’s two ways to look at that. On the one hand, it’s the most sustained fiscal squeeze in decades, outside of the crisis years of the middle 1990s. On the other, that’s measured against the vastly inflated benchmark of 2010, a year in which spending jumped $36 billion. In fact, even under the Tory plan, by 2015, the government of Canada will still be spending almost 10 per cent more real dollars per person than it was when the Tories took office.

The differences are more substantial on the tax side. The Tories propose three major tax cuts. One, they would continue with the second slice of their two-year plan, begun this year, to cut corporate tax rates from 18 per cent to 15 per cent. Two, allowing limited “income splitting” for couples with children, in which the higher earner could allot $50,000 in income to the lower earner and thus lower their collective tax burden. That’s projected to cost $2.5 billion in its first full year, though it would not go into effect, the Tories say, until 2015. And three, doubling the amount that can be invested inside tax-free savings accounts, to $10,000, again starting in 2015. That won’t cost much at first: just $30 million in its first full year. But over time, the cost will mount. In just five years, a couple could put $100,000 into their TFSAs—enough, the economist Kevin Milligan calculates, to spare 91 per cent of households from paying any tax on their investment income. If everyone did that, the revenue loss could be in the billions.

I haven’t spelled out the revenue cost of the corporate tax cut, because it’s a subject of some controversy. That’s because the Liberals would raise the corporate tax rate back up to 18 per cent. Big deal, you might say: that’s where it was last year. But it’s three percentage points more than the 15 per cent the Tories would cut it to next year—enough, the Liberals say, to add between $5 billion and $6 billion to federal revenues, and pay for their new spending. Except it’s hard to find any independent expert who thinks it will raise anything like that amount. The parliamentary budget officer estimated it at $4.6 billion but acknowledged this was based on “static” analysis, i.e., it did not take into account how corporations tend to react to increases in tax rates, which is a) to shift income to lower-taxed activities and jurisdictions, and b) to cut investment, and therefore to earn less income. The economist Jack Mintz has estimated that the revenue gain could be as little as $100 million.

That’s not the only tax increase in the Liberal plan, though it’s the only one they explicitly account for. The Liberals also pledge to “work with the provinces and territories to enhance the Canada Pension Plan,” including “a gradual increase of the defined benefits under the core CPP.” (They also propose a voluntary CPP supplement called the Secure Retirement Option.) They don’t say how much of an increase, but it surely implies a commensurate increase in CPP levies. And the Liberals also propose a national “cap and trade” system of tradeable emissions permits, building on a plan already in the works in some provinces, known as the Western Climate Initiative.

The plan envisages an annual auction of emission permits, but doesn’t say how much revenue it would raise. The economist Andrew Leach has calculated that if companies were required to buy all of the permits required to reach the Liberals’ targeted reduction in Canada’s greenhouse gas emissions—80 per cent below 1990 levels by 2050—the cost would be on the order of $30 billion a year. It’s unlikely to be that high: the WCI sets an initial target of auctioning 10 per cent of credits, though it says that would rise in later years. But how much the Liberal plan would cost is as much a mystery as how much CPP rates would rise.

Fortunately, the NDP’s plan is more explicit. The party would spend quite a bit more than either the Liberals or Tories: an increase of $20 billion a year over the budget track by 2014-15. Where would it find the money? In large part, again, from raising corporate taxes: the NDP would hike rates all the way back to 19.5 per cent, which it claims would yield an additional $9.9 billion. It also proposes a cap and trade scheme, with auctions of permits much like the Liberal plan, with revenues forecast at $3.6 billion in the current year (assuming one could be implemented in time) rising to $7.4 billion by 2014-15. And the CPP? The NDP commits to “an eventual goal” of doubling benefits. Does it also propose to double contributions, then?

The Tories once expressed interest in both ideas. But plans to expand the CPP were abandoned for lack of support among the provinces (the Tories instead propose an add-on known as a pooled registered pension plan). And while the Tories favoured a cap and trade system as recently as the 2008 election, they have made it conditional on implementation of a similar system in the United States. Plans there have stalled in the face of opposition in Congress.

Of course, there is much the parties agree on, as well. All the parties would increase payments to low-income seniors under the Guaranteed Income Supplements, though the Tories would do so by less than the Liberals and NDP. All have hastened to support paying Quebec $2.2 billion in “compensation” for harmonizing its sales tax with the GST, a feat that was supposed to have been achieved 20 years ago. And all three leaders, within the space of a few hours, committed themselves to continuing to increase health care transfers to the provinces at the current rate of six per cent annually, past the 2014 deadline to which the federal government had previously been pledged—the Liberals and NDP indefinitely, the Tories for another two years.

All of which would be fine, were we not about to undergo a fundamental demographic transformation that will reverse all of the assumptions that have guided policy for the last 50 years and make irrelevant the parties’ careful assurances that their plans have been “costed”—i.e., they come with numbers attached—and that these numbers can be made to add up if you arrange them in columns and put a line under them. I speak, of course, of the arrival of the baby boom generation at retirement age, and the enormous twin challenges this will present over the next 40 to 50 years: on the one hand, to pay the costs of looking after them, notably for health care, and second, finding enough workers to pay the tab.

The timely arrival of a study on the costs of health care, co-authored by David Dodge, the former governor of the Bank of Canada, for the C.D. Howe Institute, just as the parties were releasing their platforms, casts a weird light of unreality on the proceedings. If nothing were done, Dodge forecasts, health care costs would rise from 12 per cent of GDP today to 19 per cent of GDP by 2031. On the other hand, if everything were done, if we wrung every drop of efficiency out of the system and caught every break we could, we might succeed in holding the increase to…16 per cent of GDP. Add in the unfunded liability in the CPP/QPP, currently estimated at roughly $800 billion, and the economist Bill Robson, also of C.D. Howe, calculates the aging population represents a net unfunded liability—that is, promises to pay that we have not set aside the funds to actually pay—on the order of $2.8 trillion. But never mind: all of the parties promise to balance the budget in 2014-15. (Well, all except the Liberals, who pledge to bring it down to one per cent of GDP within two years. It’s currently budgeted at 1.7 per cent of GDP.)

With the proportion of the population of retirement age projected to double in the space of 20 years, it is simply madness to be throwing still more money at the elderly, let alone doubling the CPP. As it stands, Canada has one of the most generous retirement systems in the world, which goes far to explain why the elderly have a lower rate of low income than the rest of us. Likewise, with the workforce projected to decline, not only as a share of the population, but over the next decade, in absolute terms, it is simply arithmetical nonsense to pretend that we can raise health care spending at six per cent per year ad infinitum—even if the current five-year plan allows for it. As it is, the provinces are devoting nearly half their budgets to that one department, and the baby boomers have only just begun to retire.

This is the great, slow-motion crisis that all of the parties have refused to confront. It isn’t only the problem of how to rein in galloping health care costs—a problem that will mostly confront the provinces, whatever level of assistance the federal government may offer. The real challenge, if we do not wish to impose such an enormous relative burden on the next generation of workers, will be to expand the denominator—to achieve faster rates of growth in productivity, and thus to make our children so much wealthier than we are that they can afford the costs of looking after us. That will require much more radical policies, and much more political daring, than any of the parties have shown in this election.