The Conservative – Liberal Fiscal Box

As the federal political parties begin to make promises of new spending or tax cuts, the question arises as to how much fiscal room is available to Canada’s next government.The short answer is that the Conservatives and Liberals have locked themselves into the same fiscal box, and only the NDP has the room needed to make new commitments.

As Erin Weir and I argue in a paper on the Harper Tax Record which is soon to be published by the CCPA, there has been an essential continuity from the Liberals to the Conservatives in terms of shrinking the fiscal capacity of the federal government through tax cuts (notwithstanding Harper’s attempt today to paint himself as a tax cutter and Dion as a spender. http://www.conservative.ca/EN/1091/104588

The Conservatives and the Liberals may have differed on the wisdom of the GST cut, but the outgoing Liberal Government was committed to deeper personal income tax cuts than those implemented under Harper, and also to deep corporate income tax cuts.

All parties in this election appear to be committed to balancing the books, even if we hit a recession. The federal Budget is still in surplus, but the planned 2008-09 surplus of $2.3 Billion is likely to shrink given that the economy is now teetering on the brink of recession.

Budget 2008 states that a 1% fall in real GDP growth lowers the federal budget balance by about $3 Billion. That makes modest forecast surpluses of $3.1 Billion in 2010-11 rising to about $5 Billion in the two fiscal years thereafter look rather vulnerable to the still deepening domestic and global economic downturn.

Moving forward, the once large underlying federal surplus is modest at best because of the two point Conservative cut to the GST which will cost $ 12 Billion this year, rising to $14 Billion in 2012-13, and continuing corporate tax cuts.

Neither of the main opposition parties have said that they will repeal all or part of the GST cut, and Dion made a very explicit promise to that effect yesterday.

Dion has, of course, promised a carbon tax, but all of the new revenues it would raise have been fully allocated – overwhelmingly to tax measures – as part of the so-called Green Shift. This does not include funding for the $1 Billion manufacturing fund he has already promised, and no doubt other program spending promises in areas such as child care, infrastructure and health care are on the way.

Moving forward, federal fiscal capacity will continue to shrink significantly because of promised corporate income tax cuts. The federal corporate tax rate in 2008 is 19.5%, but it is set to fall in four steps to 15% by 2012 (to 19% in 2009, 18% in 2010, 16.5% in 2011 and 15% in 2012.) Each one point cut in the rate costs Ottawa $1.75 Billion per year. Thus, by the end of the term of the next government, federal corporate income revenues will fall by almost $8 Billion per year compared to the status quo, and by more than $15 Billion compared to revenues that would have been collected at the 21% rate in place as recently as 2005 (including the previous surtax.)

Dion and his Finance critic John McCallum have enthusiastically endorsed these corporate tax cuts – notwithstanding the fact that already deep and costly cuts have dismally failed to stimulate new business investment. The Liberals cut the federal corporate tax rate from 28% to 21% in 2000, and promised further cuts (to 18.5% by 2011) even before Harper was elected. They have since enthusiastically endorsed the planned cut to 15%, and even added another 1 point cut, to 14%, as part of the “green shift.”

Only the NDP have opposed these deep across the board corporate tax cuts. Indeed, in the Martin minority days, Layton temporarily blocked the corporate tax rate rate cut and redirected the proceeds to social programs and infrastructure as part of what came to be known as the NDP Budget.

Thus, of the three main parties, only the NDP have significant room to announce new programs in this election by redirecting fiscal resources. The Conservatives will have to cut existing spending or raise existing taxes to fund any significant new spending or tax cut commitments. And the Liberals have locked themselves into precisely the same fiscal box.