Canadians have been misled to believe that the global economic downturn, not persistent cuts to the revenue base, is to blame for the need for austerity.
By incrementally slashing the federal government’s revenue base, Canada’s Conservatives have created conditions to justify an austerity budget – even in a country that had already cleaned up its balance sheet in the 1990s. In fact, the federal deficit would already have been eliminated if it were not for the choices that the Harper government made before Canada’s recession even hit.
Postmedia’s Stephen Maher recently compared the activities of the Harper government to policies pursued by Ronald Reagan in the 1980s. Indeed, the Conservatives did use their initial years of government to “starve the beast,” depriving Ottawa of revenue.
Unfortunately, the Conservatives neglected to outline their plans in their election platforms, or directly with citizens in local debates or town halls, never engaging in real conversation with voters about their fiscal intentions and subsequent record. It is not surprising that a November Harris-Decima poll told us that a clear majority of Canadians blame the international economy, rather than Conservative actions, for next year’s deficit.
Why are Canadians, and much of our punditry, so unaware of the extent of Conservative tax reforms? It seems the Conservatives have been taking advantage of “boiling frog syndrome,” slowly increasing the temperature of the water so that we don’t even realize we’re in danger until it is too late.
The federal deficit, this year estimated at $26 billion, would already have been wiped out had the Harper Conservatives not taken more than $30 billion per year out of the federal tax base.
The Conservatives used budgets and fiscal updates from 2006-2008 to introduce sweeping personal and corporate tax changes. Federal revenue in 2014-15, the last full year of the Conservative mandate, is estimated to be $285 billion, which means that Conservative actions have reduced the tax base by over 10 per cent since they took office. While many of these tax reductions were small, targeted tax credits (such as the fitness and public-transit tax credits), significant revenue was lost through a handful of much more consequential measures:
1) The two-point reduction in the GST will have reduced tax revenue by approximately $14 billion per year by 2014-15.
2) After a Liberal corporate tax reduction plan that reduced rates from 28 per cent to 19 per cent, the Conservatives reduced them yet again, first to 18.5 per cent and then to 15 per cent, at an additional cost of approximately $7 billion per year. In fact, the Conservatives continued to cut corporate taxes even while the federal government was in deficit.
3) A lesser-known but highly expensive tax credit introduced by the Conservatives is a $1,065 Employment Credit, which, for 2011, at the base federal tax rate of 15 per cent, was actually worth only $160 for taxpayers who have employment income. The total cost for this $13-per-month tax credit is $2 billion every single year.
4) The Conservatives introduced a $2,100 Child Tax Credit, which should not be confused with the $100-per-month taxable cash payment (the Universal Child Care Benefit) that they introduced. The Child Tax Credit provides a tax reduction of up to $320 per child each year for families paying tax. This credit is not refundable, so it does nothing for families who do not earn enough income to pay taxes (particularly single-parent families). The Child Tax Credit costs $1.5 billion every year.
6) While the vast majority of funding in the Economic Action Plan went to time-limited spending of only a two-year duration, most tax-reduction measures were permanent. This included an increase in the Basic Personal Allowance, which amounts to over $2 billion per year on an ongoing basis.
7) In 2008, the Conservatives introduced the Tax-Free Savings Account, which currently has a cost of a few hundred million dollars per year. However, as additional funds are invested in TFSAs, the cost will rise to at least $3 billion per year, with a disproportionate share of the tax benefit concentrated with wealthier Canadians.
Taken together, these measures, as well as additional smaller-scale actions, have removed over $30 billion from the federal government’s revenue base, a larger figure than this year’s federal deficit.
With their commitment to cut the GST by two points, the Conservatives could legitimately cite an electoral mandate for the fulfilment of that promise. The 2006 Conservative platform, however, made no reference to cutting corporate taxes beyond the levels promised by the Liberals, and it made no reference to the employment credit, the child tax credit, pension income splitting, or the Tax-Free Savings Account.
Where there was reference to broader fiscal policy, it was in the context of fiscal responsibility and a commitment to pay down at least $3 billion on the national debt every year – a commitment thrown away after two years. There was no mandate to “starve the beast,” and Stephen Harper told Canadians during the fall election of 2008 that there would not even be a deficit.
Given that lack of transparency, it is not surprising that Canadians overwhelmingly believe that the deficit was caused by the world economy and not the $30 billion that was pulled out of the fiscal framework by the Conservative government.
It is an entirely legitimate neo-conservative policy position to reduce tax revenues rather than maintaining a balanced budget. It is also an entirely legitimate neo-conservative policy position to use newly created deficits as an excuse to shrink government. Unfortunately, unless those policies are shared with the electorate, they lose their democratic legitimacy, making citizens even more cynical about the promises that politicians make during election campaigns.
The Conservative government did not run on creating a deficit. In fact, it denied that it would ever run a deficit. Nevertheless, it put the federal government in a deficit before the stimulus program was even launched, and has never tried to defend that.
Having successfully “starved the beast” with little fanfare or platform mandate, the Conservatives are now about to launch the follow-up austerity budget. In short, they got away with it.
Photo courtesy of Reuters.