WELCOME BACK MR. OLIVER
You have been Minister of Finance now for about six months. Parliament will resume sitting this week and the House of Commons Standing Committee on Finance has already begun its pre-budget consultations.
You may be wondering what exactly you should do over the next 6 months leading up to the 2015 budget. Expectations are already running very high for this budget and a failure to fulfill these expectations could have serious political consequences.
Your predecessor, the late Jim Flaherty, left the budget in pretty good shape for you. There is a very high likelihood that the deficit will be eliminated in 2014-15 a year earlier than your political commitment of 2015-16, You already have the final financial results for 2013-14, which, in our opinion, will show a deficit significantly lower than what was estimated in the 2014 Budget. This means there could actually be a substantial surplus this year, as well as a larger surplus in 2015-16 than the $6.4 billion forecast, along with larger surpluses in the outer years.
No doubt you have already briefed the Cabinet and your Cabinet colleagues must be salivating to get their hands on these surpluses. For five years, they have had to live with spending restraint and to focus on the single most important priority for the Government – to get rid of the deficit by 2015-16. It doesn’t matter to them that most of the deficit was created by your Government by virtue of the two point cut in the GST rate and higher stimulus spending. The real goal of the Harper government has always been a reduction in the size of the federal government.
Now, if you really want to live up to your small government conservative ideology, you would devote the entire cumulative surpluses over the next five years to reducing the size of the federal debt. After all, since 2006, your government has increased government debt by $150 billion, after falling by about $80 billion under the previous Liberal government. If you did this, the level of federal debt could be cut by almost $40 billion. That would make “real” Conservatives very happy.
But we know this is not going to happen.
The song being sung by your colleagues goes like this; “Happy days are here again and pretty soon we’ll cut taxes and spend.” Your biggest and most difficult job over the coming months will be to stop all this singing. Happy days are not here again. Difficult days lie ahead
Mr. Flaherty had to carry the responsibility of restraint. You have to carry the responsibility of a surplus. And let me assure you that in our experience with the previous Liberal government, managing a surplus is much more difficult than managing a deficit.
During a period of expenditure restraint in which all your colleagues support you, not to mention the Prime Minister, saying “no” is really not that hard. During periods of surplus, on the other hand, there may be no cabinet solidarity at all as to what to use the surplus for. Each Minister will argue that their ideas or requirements are more important than those of their colleagues. Under the previous Liberal government, Cabinet agreed on the “one third rule” for using the surplus-one third of the surplus went to tax cuts; one third to new spending; and, one third to debt reduction. Of course we all know from past budgets that the Prime Minister will make the decisions. The Prime Minister only wants you to be his “point man”.
During the second half of the 1990s, the Liberal government was “blessed” with ever growing surpluses, largely because of rapid global economic growth, especially from the United States. Regrettably for you and the government, this is not going to repeat itself in the coming years. Global economic growth, and with it domestic economic growth, are both projected to continue to be weak. Furthermore, changes in demographics will restrain potential economic growth. Whereas potential economic growth used to be 3% per year, it is now under 2%. This means that future surpluses will be severely constrained, not just for your government, but also for any future government.
One would like to hope that even these modest surpluses would be used to support good economic and social policies. But with the election on the horizon, this is not likely to be the case, not just for the Government but perhaps also for all political parties. We don’t know how the Liberal and NDP parties plan to use the surpluses. Hopefully we will know something soon.
However, your government is already on record for its commitment to allow families with children under the age of 18 to split income for tax purposes; to extend the fitness tax credit to adults; to raise the threshold for Tax Free Savings Accounts to $10,000; and to reduce government debt.
This is a very uninspiring set of policy proposals, both in political and policy terms. The late Jim Flaherty was aware that these initiatives would not get a “big political or policy bang for the buck”. We hope you will come to this conclusion as well. This will be the real test for you as Minister of Finance. Do you have the imagination, capacity, and the policy independence, to put together a policy agenda that is better both in policy and political terms, than simply rubber-stamping some misguided and out of date 2011 election promises?
Unfortunately, last week’s announcement of a new Small Business Tax Credit was not very encouraging in this direction. To put it mildly, the proposed credit does not look like it was given much analysis and critical thought. The new credit has been criticized for a number of reasons. Jack Mintz, a former adviser to the Department of Finance and the Prime Minister, wrote in the Globe and Mail “It is also poor policy by steepening the wall of taxation faced by growing firms. Special breaks for small business are politically popular but they have bad economic consequences since successful firms lose tax relief as they become larger”. He went on to say “A far better policy would be a broad reduction in the EI premium”; and that “hopefully, the tax cuts to come (in the budget) are broad in application rather than too narrowly designed and distortive.”
That's pretty serious criticism coming from someone who your own government describes as Canada’s top tax expert. I guess you didn’t bother to call him.
Your new business tax credit for small businesses is, however, consistent with the government’s previous policy of selective tax cuts for certain groups.
Notwithstanding the bad policy design of the new small business tax credit, what is more troubling was your response to its critics, that this was all the Government could afford given the commitment to eliminate the deficit in 2015-16. In other words, the only thing that matters is deficit elimination. Job creation is not that important.
In the 2014 budget, it was clear that even with the freezing of the EI rate at $1.88, excess EI revenues would account for much of the projected surpluses and that the EI premium rate would have to be reduced significantly in 2017. This was confirmed in the annual report on the EI account released last Friday by OSFI. In that report the chief actuary reported a surplus in the account of $3.5 billion in 2015. Since your government is committed to reducing taxes, why not start in the 2015 budget with a broader and deeper reduction in the EI rate? This would be good tax policy, and it would be good for growth and job creation.
However, despite the economy’s on-going dismal job performance, a broad based cut in payroll taxes does not appear to be a very high priority claim for this government against the surpluses.
Instead the response of the government to the lack of job creation is simply more tiresome rhetoric.
Surely, as Minister of Finance you would want to do better than that. You can be sure that other political parties will.
We are looking forward to your first Fall Economic and Fiscal Update. Why don’t you consider presenting it to the House of Commons Finance Committee rather than to some special interest group outside Parliament? That would show independence and self-confidence. That would be impressive.