Deficit Caused by Tax Cuts
In my career of writing letters to my hometown newspaper, my favourite headline supplied by the Regina Leader-Post was â€œDeficit Caused by Tax Cuts,â€ for a letter arguing that Saskatchewanâ€™s mild deficit a few years ago resulted from provincial tax cuts rather than from alleged overspending.
Todayâ€™s inane press release from Finance Canada, lauding the fact that “Tax Freedom Day” came three days earlier this year, prompts me to make the same point about the current federal deficit. To their credit, Linda McQuaig and Murray Dobbin have also recently made this point.
Budget 2009 projected that all tax cuts enacted by the Harper government would cost $34 billionÂ in lost revenue this fiscal year (Table A2.2). Interestingly, that amount exactly equals the deficit which Budget 2009 projected for this fiscal year.
The fact that economic conditions are even worse than assumed by theÂ Budget will reduce actual tax revenues and the cost of tax cuts by a small percentage relative to projections. ByÂ including around $10 billion for the auto bailout, Finance nowÂ anticipates a deficit of $50 billion this fiscal year. So, Harperâ€™s tax cuts no longer account for the whole federal deficit (just two-thirds of it).
The auto bailout is a one-time outlay. The federal government may add to the $10 billion, but it may also get the money back if industry restructuring and a rebound in auto sales boosts the value of its GM and Chrysler equity. By contrast, Finance expects the annual cost of Harperâ€™s tax cuts to rise to $44 billion as the corporate tax cuts are phased in and as the economy recovers.
The size of this yearâ€™s deficit (3% of GDP) should not be the issue. It would not make sense to raise taxes in the midst of recession to balance the budget. However, to avoid an ongoing structural deficit as the economy recovers, we shouldÂ consider reversingÂ Harperâ€™s tax cuts . . . even if it delays “Tax Freedom” by three days.