The Political Right on Budget 2007

In contrast to my last post, much of the business press and many conservative commentators have characterized Budget 2007 as “big spending” with “no broad-based tax cuts.” These claims reflect two (usually unstated) contentions: that spending should be measured in absolute terms rather than in relation to the economy and that tax credits are not tax cuts.

Andrew Coyne is probably the most articulate and explicit proponent of both contentions. On spending, he writes, “The implication [of measuring public spending as a proportion of GDP] is that spending should always increase, not because it needs to, but just because it can.” However, we use this benchmark of growth in line with the economy in assessing other components of GDP, such as private consumption or business investment. As noted in an excellent post on this subject, the implications of measuring public spending in absolute terms are far more bizzare. However, Coyne’s use of absolute measures allows him to express shock nearly every year that the budget has reached new heights of free-spending excess even as an ever smaller share of Canada’s economic resources are devoted to federal expenditure, including transfers.

Regarding Budget 2007’s tax abatement, Coyne explains in today’s National Post that “They are not tax cuts, in the usual sense of a reduction in tax rates. Rather, they are spending programs, delivered through the tax system. The ‘$2000 child credit’ is in fact a $310 baby bonus. The Working Income Tax Benefit (WITB) is an earnings supplement. These may be fine programs, but they’re programs: money the government gives you, depending on whether you fit the program criterion.”

The WITB, which accounts for about one-sixth of the budget’s tax cuts, can perhaps be reasonably described as a “spending program delivered through the tax system.” The Child Tax Credit accounts for about half of the tax cuts. While Coyne’s distinction between rate reductions and credits is accurate, this item’s effect is to reduce the taxes paid by a broad swath of the population. Unlike a social program, it is non-refundable and available only to people with incomes high enough to pay taxes. Presumably, a “baby bonus” would be paid out regardless of income. The Child Tax Credit and other tax cuts may not have been the ones Coyne wanted, but that does not make them “spending programs”.

In conclusion, the notions that Budget 2007 entailed “big spending” and “no broad-based tax cuts” rest on shaky foundations. Articles from today’s Financial Post and Canadian Business Online outline how this Budget delivered a great deal to business despite its centrist presentation.

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