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Why Flaherty Loves His $50 Billion Deficit

After creating it with tax cuts, he has an excuse to slash government.

By Murray Dobbin 1 Jun 2009 | TheTyee.ca

Murray Dobbin writes the State of the Nation column for The Tyee.

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Finance Minister Jim Flaherty reassures his base: Economic Club of Toronto.

It is astonishing given all the commentary and news stories about the "sudden" $50 billion federal deficit there has not been a single story in the mainstream media that focuses on the principal explanation: the huge tax cuts made by the Liberals and Conservatives since 1995.

First it was former finance minister Paul Martin with his $100 billion income tax cut over five years starting in 2000. Then it was Jim Flaherty in 2007 with $60 billion over five years. Add to that the $12 billion lost each year by lowering the GST from seven per cent to five per cent and the $50 billion is no mystery. It was an inevitability whenever the next recession hit.

But what to make of the sudden embrace of deficits by those who built their political careers on fiscal conservatism? There is no mystery here, either. Neo-cons like Jim Flaherty don't really care about deficits per se -- their ultimate goal is downsizing the social and redistributive role of government. From that perspective, the $50 billion shortfall is a godsend: a useful crisis that will provide the rationale for huge spending cuts.

Without all those tax cuts, it is arguable that there would be no deficit at all. Not only that, of course, we could have been spending that money on the collective needs of Canadians -- municipal infrastructure, national child care, pharmacare, lowered tuition fees, money for greening the economy, targeted industrial development.

Giving away the store

Between 1984 and 2006, the federal government voluntarily gave up more than $250 billion in revenue through tax cuts, which went disproportionately to the wealthy and large corporations. But just looking at the tax cuts implemented by the current minister since that time reveals that half the projected deficit was caused by Jim Flaherty himself.

According to a January 2008 study by Marc Lee, a senior economist with the Canadian Centre for Policy Alternatives (CCPA), Flaherty's 2006 and 2007 tax cuts (scheduled to be phased in over five years) would result in a loss of revenue for 2008-09 of $28.2 billion: $5.9 billion in corporate taxes, $10.3 billion in personal income taxes and $12 billion in GST revenue. The corporate tax cuts skyrocket to $14.8 billion in 2012-13, according to Lee, as the corporate income tax rate falls to 15 per cent, the lowest of the G7 and one of the lowest in the OECD.

Given the severe recession, these numbers would be somewhat lower but it does not alter the fact that the cuts were ill-advised and never accomplished their stated goals. The ideology held that these cuts would lead to economic growth and massive new corporate investment. All that was needed for endless growth into the future was for government to "get out of the way."

The corporate tax cuts produced just what one would expect -- a huge increase in pre- and after tax profits through 2007 but without any comparable increase in new productive investment or productivity. Canada has been cutting corporate taxes for 10 years to levels now well below those of our main "competitor" -- the US (where the rate has remained steady through the decade) -- and yet our international competitiveness has declined. While the statutory corporate tax rate was being reduced by 11 percentage points since 1999, the Word Economic Forum reports that our competitiveness declined from fifth place in 1999 to tenth in 2008-09.

Indeed, corporate tax rates seem to have little to do with competitiveness. Six of the top ten countries are Northern European nations with some of the highest corporate tax rates in the world.

Tax cuts and spending cuts are key elements of the Washington Consensus -- the ideology that has driven the global economy since the 1980s. This failed ideology was all about reducing the percentage of the economy devoted to public spending. This was revealed in dramatic fashion by Paul Martin in his 1995 speech on his budget, famous for cutting federal social spending by 40 per cent. Martin boasted, oddly enough, not about slaying the deficit but about reducing the role of government: "Relative to the size of our economy, program spending will be lower in 1996–97 than at any time since 1951." To maintain that lofty accomplishment, Martin rid the country of huge budget surpluses in the late 1990s with his $100 billion tax cut.

The price of a civilized society

"Taxes," said American jurist Oliver Wendell Holmes, "are the price we pay for a civilized society." Ultimately, when citizens decide questions about taxes, they are choosing between public goods and private goods. Presumably, the overall goal is one of happiness and if that is the case, a recent study suggests that so-called "tax relief" (taxes framed as an affliction) is over-rated. The Organization for Economic Cooperation and Development survey showed people in Denmark, Finland and the Netherlands ranked first, second and third, respectively, in the OECD's rankings of "life satisfaction." They are amongst the highest taxed countries in the world. Canada was eighth -- but one of only five countries to have registered a decline between 2000 and 2006.

Another study, by economist Hugh MacKenzie of the CCPA, shows that Canadians get a great deal for the taxes they pay. Every Canadian gets an average of $17,000 worth of benefits from their tax-funded public services, which translates to about $41,000 for a middle-income family -- or 63 per cent of its yearly income. Says MacKenzie: "Tax cuts don't give you money for free. They introduce a trade off between a private benefit in the form of lower taxes and a reduced public benefit."

There are only two ways to deal with the extraordinary deficits the country is facing: cuts to social spending or a return to a tax system that pays for the things we want.

Jim Flaherty can hardly wait to use the $50 billion "crisis" to start cutting.

Will Canadians stop him?

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