The $15 billion swing...

On Friday (of course on a Friday), the Department of Finance released Canada's Annual Financial Report for the 2008-2009 fiscal year. Basically, how we did from April 1, 2008 through to March 31, 2009.

In case you were wondering, we did poorly.

At the beginning of the fiscal year, Canada had a budgetary surplus of $9.6 billion. 12 months later, we had a deficit of $5.8 billion. Yes, that's right. National finances suffered a $15.4 billion swing. In the wrong direction.

Now, I don't know about you but if I my household finances suffered a swing of similar proportions, there would be a heck of a conversation looming...

Being a Department of Finance document, there were lots of other statistics - the vast majority of which I won't bore you with (geeks go here: http://www.fin.gc.ca/afr-rfa/2009/afr-rfa09-eng.pdf).

Now, for those concerned about the national debt (i.e. 1 of the 2 people who have commented here), we are still sitting at a comfortable 29% debt-to-GDP ratio. This is one of the numbers I suspect will get bandied about as the government is challenged on the deficit.

It gets at the ability of a country to serve its debt, and by all measures Canada is in good shape (and for that matter in much better shape than other G7 countries). Expect the government to play this up.

But let's go back to our question of the deficit and more importantly how it can be eliminated. As noted in previous blogs, it is unlikely that economic growth will take care of things for the government. Most economists expect this deficit to grow over the next few years until it approaches the $50 billion level. If we believe this needs to be addressed, what's the solution?

I'll put some thoughts down:

• As mentioned in earlier posts, increase the GST. It is consumption oriented and the previous cuts only favoured those who spend more on luxury items. Increase the tax and make sure to carve out those items which are not luxury (key foodstuffs, baby items, books - most of this is already done, but address any remaining items).

• Continue to increase consumption taxes for cigarettes and alcohol.

• Review federal assets, including foreign real estate holdings, to identify savings through divestiture.

Will any of this do the trick? Not any one item. The biggest bang will come from the GST, but I would worry about two things. First, the courage of any government to move on a tax increase. Second, the fact that for all of the spending cuts or revenue increases a government can get in place, there will be a long line of other financial asks waiting in the wings.

What I am trying to say is that the politician who tells you no tax increases is likely wrong. The politician who says no cuts to programs is also wrong. For Canada to get out of this hole the government (whoever is in charge) will need to raise taxes. They will need to cut spending (if only to make room for spending in new areas). It won't be fun, but it will be interesting...

Thoughts?