Shrinking government won’t trim deficit
Doing unpopular things like hiking GST will
By GREG WESTON,
Sunday, January 24, 2010
Canadians concerned about what kind of country we are leaving our children should check out the Taxpayers’ Federation online doomsday clock, a blur of numbers tracking a once shrinking national debt now soaring by $153 million a day.
The good news is Stockwell Day is soon coming to a town hall near you to engage the masses in much yak about returning to balanced budgets by cutting government spending.
The Conservatives have promised to eliminate the deficit within five years without tax increases or cuts to health care, education, old age pensions and other stuff considered politically sacred.
It is hard to find an economist who believes that is even possible, given the massive extent to which the government would have to shrink itself.
No matter. As of last week’s cabinet shuffle, Stock Day’s new job is presumably to travel the country in search of government excess, waste and lost paperclips.
Good luck with that. Canada’s history is littered with valiant attempts to curb government spending, an exercise once aptly described as “digging in quicksand.”
With statistical help from the taxpayers’ fed, we rewind to 1976 when an increase in the deficit from $2 billion to $6 billion prompted the auditor general to warn that Pierre Trudeau’s government was losing control of the public purse.
In response, Trudeau created a royal commission that spent three years studying financial management and accountability in government, during which time nothing changed.
The royal commission sure was a big success, though.
By the time Trudeau left office five years later, the $6-billion deficit that got the auditor general screaming was heading for $34 billion.
In 1984, Brian Mulroney and his Tory government took over the sea of red ink from the Liberals after a record sweep at the polls gave him a strong mandate to put the country’s finances back in order.
In the greatest flop since Trudeau’s royal commission, Mulroney created a special ministerial task force under then deputy prime minister Erik Nielsen to review over 1,000 government programs for possible savings.
The result filled 22 volumes of reports, recommended savings of $7 billion, and led to barely enough actual spending cuts to pay for the commission.
During the two years the task force was looking for ways to reduce the deficit, the annual budget shortfall increased to over $37 billion.
Next, Mulroney tapped his deputy prime minister, Don Mazankowski, to head a new “expenditure review committee” of cabinet, a star chamber through which all federal spending subsequently had to pass.
At the same time, the Tories slapped freezes on departmental budgets, hiring and wages, privatized some services, and killed off several agencies altogether.
For all Mulroney’s efforts to slash the $34-billion annual budget shortfall he inherited in 1984, he left office nine years later with a deficit of over $39 billion.
During that time, the accumulation of annual deficits had more than doubled the national debt.
Two years after Jean Chretien and the Liberals took over from Mulroney, then finance minister Paul Martin introduced his infamous 1995 federal budget that came to be known as simply the blood-bath.
Three years later, Martin had successfully turned a $36-billion deficit into a $3-billion surplus.
But the big myth of the day was it all happened from ruthless cost cutting.
A big part of the deficit was eliminated from raising taxes, raiding the Employment Insurance fund, and reducing federal payments to the provinces for health care and education — all the things the Harper government is now promising not to do.
In fact, less than a quarter of the deficit-to-surplus turnaround was actually from cutting government programs (and that included huge reductions in military spending unlikely today).
In 2006, the Harper government won power from the Liberals and inherited a healthy $13-billion annual surplus.
Three years later, the Conservatives posted a $5.6-billion deficit, in large measure created by politically popular cuts to the GST and other tax revenues, while increasing spending on government programs by $32 billion, or 18%.
If the Harper government were serious about rebalancing the nation’s books, it would start by reversing the GST cuts and other goodies the country clearly can’t afford.
Instead, poor Stock Day is being sent forth to convince Canadians the deficit can be cured by digging in quicksand.
The more things change ...
'Marshall Plan' for trusts
Diane Francis, Financial Post
Tuesday, January 19, 2010
The income trust flip flop in fall 2006 still haunts Stephen Harper, the Prime Minister. It has cost him in polls and will likely do so in 2010 again as Ottawa's punitive 31.5% tax on the remaining 169 income trusts will force them to privatize or be taken out by big corporations or pensions.
His policy boondoggle caused damage:
-A broken promise by the Prime Minister made, unequivocally, to leave trusts intact because of their importance to small investors and retirees.
-The soiling of the country's reputation because the flip-flop was retroactive and confiscated $35-billion in value.
-The disappearance of 51 income trusts (out of 220) bought by foreigners and others who do not pay taxes.
-Evidence that the Finance Department did not understand nor do the necessary homework.
The Liberals say the 31.5% income trust tax should be 10% this year to prevent huge disruption. But a more elegant solution has been put forward by a truck driver from Cornwall, Ont., David Marshall, and his wife, Lorraine. Dubbed the "Marshall Plan," it has been formally submitted in response to requests by the government for ideas before the March budget.
In a nutshell, the "Marshall Plan" calls for creation of a unique tax shelter where income trust units held in RRSPs could be placed and the 31.5% tax avoided. In return, any capital gains tax would be deferred until monies were withdrawn but the distributions to unitholders would be taxable every year.
This could be an instant windfall to Ottawa. The 169 trusts that are left pay out about $16-billion annually in distributions to their unitholders and this income, if taxed annually at an average dividend rate of 38%, would generate $6-billion a year in taxes to Ottawa.
If this is not done, the damage already caused will multiply. Since 2006, the policy led to the buyout of 51 income trusts by purchasers who don't pay taxes (pensions) or who will write off profits against interest payments on debts used to acquire the trusts. This phenomenon is the most damning indictment of the 2006 nonsense and will be compounded this year.
Some may argue that the Marshall Plan constitutes another bailout. But that's nonsense. How can a tax shelter that yields $6-billion a year in taxes be a bailout? How can a tax shelter that allows the feds to eventually tax capital gains when it collapses or funds are withdrawn be characterized as a bailout?
The Caisse de Depot et placements du Quebec, National Bank and others were rescued after they didn't do their homework and peddled or bought asset-backed commercial paper. So what's the justification for not rescuing innocent investor-victims who did their homework and were promised protection, then double-crossed?
The income trust policy is a blunder but can, thanks to a truck driver and his wife, be somewhat corrected. Only if Harper and Jim Flaherty, the Minister of Finance, heed and adopt the Marshall Plan in the budget this March.
Full details on the Marshall Plan here: http://caiti-online.blogspot.com/2010/01/2010-budget-consultations-marshall.html
Sunday, January 24, 2010
Posted by Fillibluster at 8:49 AM