PLEASE! NO MORE PROMISED TAX CUTS IN 2015: WE CAN’T AFFORD THEM
David Dodge, a former Deputy Minister of Finance, Deputy Minister of Health, and Governor of the Bank of Canada, has recently released a study on the growing costs of health care in Canada in the coming decades and the impact they could have on all governments –federal and provincial. He joins a long list of health care experts, economists and policy analysts who have warned governments that the there will need to be radical changes in the way health care services are delivered in Canada and the strong probability that taxes will have to be raised.
Regrettably this issue will not likely be discussed during this election by any of the political parties. No political party wants to touch this issue with a ten-foot pole, because no political party wants to confront the difficult choices. This is unfortunate since the health transfer agreement between the federal and provincial governments will have to be renewed in 2014 if the federal government is to continue to make payments to the provinces.
But the issue of health care is not simply an issue of making the system of health care more efficient. Solving the health care problem requires making the economy more efficient as well. Potential economic growth is going to slow dramatically over the coming years because of slowing growth in the labor force, due to growing demographic trends, and continued poor productivity performance. This must be addressed as well, if the health care crisis is to be avoided.
There are a number of things governments could do to strengthen economic growth and the platforms of all the parties contain small initiatives that might help. But the most important thing for governments to do is to ensure a tax system that encourages savings and investment, and minimizes distortions and costs. Such a tax system would place the greater burden of tax rising on consumption taxes such as the HST, and reduce the burden on income taxes. But there is more to it than that. If the income tax system is to have the lowest tax rates possible then the government should not be burdening the income tax system with distortive special tax preferences that are neither effective nor efficient. Government should stop using the tax system for “social, industrial, and political engineering” as has been the case in recent years.
The federal tax system is a mess and is becoming even a bigger mess as this election continues. The latest are a special tax preference for adults to engage in fitness activities, income splitting for high-income families with children, and a doubling of the tax free savings account contribution.. These proposals are on top of a slew of earlier special preferences that serve no useful purpose and simply increase inequities in the tax system and the cost of tax compliance. Business taxes are also full of special preferences that have been in place for decades and only serve to distort economic activity and reduce economic growth.
Dealing with health care crisis will require a major tax reform/simplification exercise. Tax reform is not easy because once a preference is given it is hard to take it back. It will take strong political will, but it would pay off substantially. Tax reform could easily save tax payers as much as $5 billion annually.
But this will not likely be enough. Higher tax revenues will be necessary as well. The federal government (also provincial governments) is facing a growing structural deficit. In our submission to Minister of Finance Jim Flaherty last January (3dpolicy.ca) we encouraged him to take this into account in his budget planning and to be more transparent with Canadians on the consequences of an aging population. Not surprisingly our advice, and the advice of the International Monetary Fund and the Parliamentary Budget Office, was ignored. Cutting government programs and services may help but it won’t be enough. The reality is that maintaining quality public health care and other essential services (e.g., education) will likely require an increase in taxes revenues. Paying for health care by increasing the debt for future generations should not be an option.
Any government that is elected will not be able to ignore the coming health care crisis and resulting structural deficits. Promising tax cuts for 2015-16, if the deficit is eliminated, is irresponsible no matter how small the promised tax cut may be. It is wrong to delude Canadians into thinking that these tax cuts are without cost. It would be nice if all political parties were to declare a moratorium on all proposed tax cuts until we have a strategy to deal with looming health care crisis. This won’t happen, but the deficit won’t be eliminated in 2015-16 either.