Are taxes the only way out of the deficit?

ANDREW COYNE: The government has a choice. It can either break its promise not to raise taxes. Or it can break its promise not to cut transfers.

We’ll pay for this one way or another
The Great and the Good have come down from on high, and delivered their decree: there shall be tax hikes. The deficit that was once our friend is now our enemy, no longer “stimulative” but “structural.” The spending spree that gave us that deficit cannot be reversed, or not altogether. If the deficit is to be slain, it must therefore be by raising taxes. Thus sayeth the elders, including former Bank of Canada governor David Dodge, two former deputy ministers of finance, and Jeffrey Simpson.

Well, maybe. What is certainly true is that the fiscal forecast, once an unbroken line of surpluses as far as the eye could see, has darkened considerably. Not only is the deficit headed for $56 billion this fiscal year, but it will still exceed $11 billion even four years from now. And that’s on the government’s cheery numbers. The parliamentary budget officer forecasts the 2014 deficit at $19 billion—after four years of (assumed) steady economic growth. Just in time for the next recession to blow it sky-high again.

So clearly we have a problem on our hands. But is it true that fresh taxes are the only remedy? Are government ministers—and, to be fair, the Opposition leader—dissembling when they claim to be able to balance the budget without such harsh measures? Are they, as the Great and the Good suggest, failing the test of leadership? Should that be the new red badge of courage—a politician’s willingness to raise taxes?

It’s worth remembering, by way of answer, how we got here. The G and G like to cite the effect of the Conservatives’ cut of two percentage points off the GST, and certainly that was and remains a costly blunder. If taxes were to be cut, far better to cut income taxes, which the Tories have barely touched. (On the plus side, it may have made it easier for Ontario and B.C. to contemplate harmonizing their own sales taxes with the GST.)

But with or without the GST cut, we’d still be in surplus—yes, even today—had the last two governments shown the slightest discipline in spending. Had the Liberals, after 2000, held spending growth to a rate sufficient to cover increases in population and inflation—that is, had they held spending constant in real per capita terms—they would have left the Tories with a budget of $148 billion in fiscal 2006, instead of the $175 billion it turned out to be. Had the Tories done the same, we’d be spending $169 billion in the current fiscal year—not $242 billion. In other words, the federal government is today spending nearly 50 per cent more real dollars per citizen than it did a decade ago. That’s why we’re in this mess.

Well, water under the bridge, you may say. They’ve spent the money, and now we’re stuck with the bill. But the good news is that even today, even after the explosive growth in spending of the last 10 years, we can still balance the budget by 2014, without raising taxes. The bad news—well, we’ll get to the bad news in a minute.

The government’s September fiscal statement shows annual revenues growing by nearly a third between now and then, from $217 billion to $285 billion: roughly seven per cent per year. Assume that’s overly optimistic, and pencil in $276 billion in revenues for fiscal 2014 instead. To balance the budget in that year, assuming interest costs of $42 billion, will mean holding program spending to $234 billion.

That sounds tough. It’s roughly $20 billion less than the government currently projects. But it’s still about $28 billion more than it spent last year, before the massive “stimulus” binge. As it happens, that works out to holding government spending level, adjusting for population and inflation growth: not using 2000 as the benchmark, as I did before, but 2009. That doesn’t sound impossible.

Or it wouldn’t, had not the government added two further conditions to its “no tax hikes” pledge: that it would make no cuts in transfers to provinces, or to persons (notably old age pensions and employment insurance). But these make up more than half the budget, and are slated to grow by 13.6 per cent over the next four years. To keep overall spending to our targeted $234 billion in 2014 would require cutting the whole $20 billion out of the rest of the budget: about one dollar in six.

Is that possible? Certainly not without a majority government, and probably not even then. So, in the short term, the government has a choice. It can either break its promise not to raise taxes, as the G and G have urged it should do. Or it can break its promise not to cut transfers, as, well, Terry Corcoran has suggested. The one thing it cannot do, if it has any intention of bringing the books back into balance by then, is sit tight, make a few cuts around the edges, and hope for a miracle. Which, of course, is precisely the policy course it is on.

Oh, and the bad news I promised you? Balancing the budget four years from now is the easy part. From here on in, the fiscal choices are only going to get harder. The retirement of the baby boomers over the next several decades will mean astronomic increases in costs, notably for health care, with relatively fewer people of working age to pay them. The C.D. Howe Institute’s Bill Robson estimates this represents a total unfunded liability in excess of $2 trillion.

Raise taxes, or cut spending. You think the debate is fierce now? We have not yet begun to fight.We’ll pay for this one way or another