Jeffrey Simpson on Flaherty’s Voodoo Economics

Jeffrey Simpson makes a remark in today’s column that you heard here first:

Mr. Flaherty has been bragging that the second GST cut was clairvoyant, because it added stimulus for an economy now slowing.

This observation is laughably bogus. The government did not see the slowdown coming. The second one-point cut was entirely political. To link it to today’s slowdown is to rewrite recent events, ascribe motivation where none existed, and create a post facto policy rationale for a move denounced by almost every economist in Canada, then and since.

Yes, the slowing economy, a phenomenon centred in the United States, will cause a tightening of Canada’s fiscal position. Ottawa’s fiscal position will be more stringent than Mr. Flaherty might have anticipated just a few months ago.

But I would beg to differ with Simpson on what to do. Simpson argues that the GST cut should be rolled back and put instead into income tax cuts on the grounds that these would boost productivity and competitiveness. I am pretty skeptical that this would be the result given prevailing rates of taxation.

What we really need is to make investments are in areas like transportation, fighting poverty and climate change. These require that the state (God forbid) actually use tax revenues to solve problems. No tax cut will solve these problems because they need collective solutions, and soon.

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