Wednesday, October 14, 2009

Uh, we seem to have lost several billion dollars. Has anyone seen them?

Yes, we have a deficit. And yes, it's big and growing. So what should we do?

In answering, I think it is important to consider how we arrived at the current state of affairs. Without question the economic stimulus introduced though Budget 2009 (or Canada's Economic Action Plan if you prefer the marketing approach to government policy) accounts for a lot of the deficit.

But what else? Well, increased government spending pre-economic crisis ranks right up there. Over the past several years, under both Conservative and Liberal governments, federal expenditures have steadily risen.

For a time, this was ok as the economy and government revenues (through taxes) were growing more quickly. The GST alone was bringing in billions each year. Eliminate the deficit - sure! Need a Canada Foundation for Innovation? No problem! Pay down debt? Bingo!

Things were so good, in fact, that in 2006 the decision was made to reduce that cash cow of cash cows. The cuts the Conservatives made to the GST (in two phases) took billions out of the government's coffers.

Ok, fine. So what about spending? Did government adjust for this loss in revenue? In a word, no. Corporate and personal taxes were lowered, thereby reducing revenues further. And overall program spending rose (defence was a big leader), further chipping away at the remaining surplus.

The result was that Canada was close to or more likely in deficit this time last year. Pre-crisis. The ensuing stimulus measures, combined with a sharp reduction in government tax revenue as the economy faltered, then took things to the levels we see today.

I raise this because knowing how we got there should help us figure out how we get out. It's like when you lose your keys. The first thing someone says is, "Well, where did you last see them? Retrace your steps."

In our case, we have "lost" billions. Retracing our steps leads us, from my perspective, to this conclusion. Spending must be lowered and selected taxes must go up.

Ok, that was the easy part. Now for the challenge. What spending gets cut? What tax gets raised?

For me, returning the GST to pre-2006 levels - while not a political winner - may be the route to go. I would not be surprised if at some point the Liberals float this one to see how it plays.

On spending, the winding down of the stimulus measures will help. However, there are big ticket items out there including a new spending accord with the provinces on health care. You think saving GM and Chrysler were expensive, try health care on for size.

Then you have the Liberals, who having moved away from the green shift are now looking to invest heavily in a green economy. That can't be done on the cheap.

I raise this because for every expense that is cut, there are 5 new unfunded ideas lining up and needing money to get them going. That isn't to say they aren't good ideas or the right things to do. It's just that they are expensive and money will be tight.

This is the challenge facing anyone who wants to be PM and form a government. Still want the job, Mr. Ignatieff?


  1. There is no possible way they can raise the GST and retain any dignity whatsoever. Its just too bad for programs. Cut them - many of the initiatives that the govt is obligated to are projects that dabble in provincial jurisdiction. Strict division of powers and major cut backs needed.

  2. They will eventually have to do it,raise the GST, they are losing billions of dollars from it. For some reason we feel like we are ahead of goverment by deducting that 2%, I think is more in our heads than anything else. Helpful? Of course it is, with some bigger purchases! but it is necessary and I can't see any other way to get back to a surplus....

    Of course, ideally, would be for goverment to cut back and stick with it, save money here and there, but where,
    which programs, what?


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