The Tax Back Guarantee in Action

As usual, the federal surplus has come in far larger than forecast: $14 billion for 2006/07. As legislated through the Tax Back Guarantee, all of the interest savings from this debt repayment will finance personal income tax cuts. Therefore, the 2006/07 surplus will reduce income taxes by $0.7 billion annually.

This tax cut will barely put a dent in federal income taxes, which generate nearly $110 billion per year. However, $0.7 billion is a significant amount of money. Added to the Conservatives’ new $0.3 billion transfer to provinces for childcare spaces, it would be almost enough to honour the original NDP-Liberal early learning and child care agreements.

For posterity, here is what I wrote about the Tax Back Guarantee on budget day:

As promised in the 2006 Economic and Fiscal Update, Budget 2007 provides a Tax Back Guarantee that all interest savings from debt repayment will be used to reduce personal income taxes. At best, this policy is a harmless gimmick. At worst, it places an inappropriate constraint on future budgets.

If income-tax reductions would have been implemented anyway, then claiming to (partially) finance them through interest savings is meaningless. Because money is fungible, the distinction between “interest savings” and “general revenue” is artificial. Using a dollar of “interest savings” to cut income taxes simply frees up a dollar on “general revenue” for other purposes. Similarly, using a dollar of “general revenue” to cut income taxes frees up a dollar of “interest savings” for other purposes.

However, given the pledge to repay at least $3 billion of debt annually, the Tax Back Guarantee effectively mandates a corresponding minimum level of income-tax cuts in every budget regardless of changing fiscal circumstances. If future revenues are less than projected, the government might “need” to cut spending in order to fulfill its “guarantee.”

I also made this case to the House of Commons Finance Committee. To her credit, Judy Wasylycia-Leis subsequently tried to amend the Tax Back Guarantee to use the interest savings for municipal infrastructure rather than for tax cuts. The NDP continues to display political courage in publicly opposing such a popularly-named initiative.

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