The Harper Government as Poor Economic Managers

The Harper Government as Poor Economic Managers

by

Howard Adelman

In Part II of this morning’s blog I want to continue the focus on Harper’s economic policies, but less from the perspective of macro-economics and more with a focus on specific economic policies. A reputation for good economic management is Harper’s strongest suit. That reputation is undeserved. This morning I will make my case by reference to his specific economic policies.

I already mentioned the issue of pensions. Harper has been a vocal critic of the Ontario government’s new pension plan, one that imitates in many ways the Quebec plan. He calls it a new tax, as if a tax were a disease. Yet in any economic measure, pension contributions are not a tax. They are forced savings, savings which can be invested in stocks and in bonds. Instead, Harper has proposed or delivered a series of induced savings.

One example was the increase in the tax free saving allowance (TFSA) to $10,000 from $5,500, even though there is a majority consensus among economists that this will only benefit the upper income group because the members of that group will be the only ones with enough discretionary income to put into savings accounts of this type. At the same time, the Canada Revenue Agency has demonstrated that one-fifth of Canadian taxpayers have already maxed out their TFSA. Upping the limit may have been justified; the increase in the annual contribution was not. The cost to the treasury will be enormous, but only the rich few will benefit. Increasing the annual amount of tax free savings not only benefits a small percentage of Canadians who are rich, but in the long run, according to the parliamentary budget office, the doubling of the TFSA will cut out $40 billion in revenue for both federal and provincial governments by the year 2080. Talk about taking benefits for the present generation and imposing a burden on future generations!

There is another whopper of an error – the introduction of income splitting. The Conservative Party allowed couples with minor children to split incomes up to $50,000 of income. Income splitting does both benefit and encourage spouses (overwhelmingly women) to stay home rather than go out to work while raising a family. So those who espouse traditional family values with the female member of the household staying home, benefit. Only 15% of the population, all upper income earners, show a gain. Two-earner families end up paying relatively more tax than one-earner families. Permitting income splitting encourages an increase in one-income families – certainly the better off where only one parent with a significant income will benefit. In fact, as the conservative think tank, the C.D. Howe Institute has shown, “The gains would be highly concentrated among high-income one-earner couples: 40 percent of total benefits would go to families with incomes above $125,000.” Since gains could reach $6,500 in federal tax savings and almost $6,000 in provincial tax revenues, the cost to the Treasury is huge, $2.7 billion in lost revenue at the federal level and $1.7 billion at the provincial level. The marginal effective tax rate for most lower-earning spouses would be raised significantly. In effect, the measure is a tax subsidy to those who leave the labour market, largely an educated and trained group that are needed in the economy.

Along the same line, the Conservatives have increased what used to be called the baby bonus and is now called the Universal Child Care Benefit (UCCB) just in time for the election instead of increasing the Canada Child Tax Benefit (CCTB). This, along with income splitting meant a $3 billion cost to the Canadian budget. Yet the CCTB has proven to be the better route to assist families with children.

What about the reduction of business taxes for small businesses from 11% to 9% gradually over the next four years in response to the lobbying of the Canadian Federation of Independent Businesses (CFIB)? Harper had already reduced those taxes to 11% in 2008.  Canada has already one of the lowest business tax rates in the world with a large business tax of 15%. The incentive to decrease corporate taxes arose with globalization and the race to keep large businesses in one’s own country. Harper has provided $60 billion dollars in tax relief to corporate Canada. Yet there is little evidence that job creation increased in proportion to tax decreases. In fact, the rate of job creation has slowed. What was needed was tax incentives for companies that created new jobs.

Admittedly, most economic challenges – the drastic drop in oil prices in particular – have not been in control of the government. But the glut in oil was foreseeable as shale techniques expanded and the USA became self-sufficient in oil production, and as new sources of fossil fuels were discovered. Betting on the oil patch at this time was clearly a mistake.

Job growth has been the weakest under Harper compared to previous governments. Harper fumbled the negotiations for Canada to enter the Pacific free trade agreement. One way to increase jobs is to increase exports, particularly exports of professional services which constitute 70% of the economy and the source of 80% of the new jobs. Where are the incentives to encourage our architects and engineers, our accountants and statisticians, our graphic artists and our medical specialists to export their skills? Instead, the government crippled Statistics Canada which did sell its services abroad and used to be recognized as the best set of statistical services in the world.

The biggest effort the Harper made was to lower the sales tax from 15% to 13%, a very popular measure which the Liberals and NDP have promised not to touch even though shifting taxes from income to consumption is generally seen as beneficial provided lower income groups are protected so that their proportion in paying taxes is not harmed.  No one likes to raise such a visible tax, but since it was reduced, this can be viewed as the major reason the country has been in deficit since 2008.

The largest problem, however, has not been the relative harm versus good of all these individual measures. It is the absence of an economic vision and plan for Canada. If the accumulation of policies to tweak the economy, but really attract more votes, has failed to:

  • increase the rate of new job creation
  • benefit the underemployed young who no longer have the prospect of earning a middle class income and purchasing their own home
  • help the largest section of our growing youth population consisting of aboriginal youth but, instead, increases their disadvantages
  • even invest, or encourage investment, in the environment, one of the fastest sectors for growing the economy, if only for the economic benefits and in spite of the government’s continuing mindblindness to the issue of climate change;

then where are the hopes and dreams of young Canadians?

There are alternatives, admittedly none of them terribly inspiring. The Green Party’s is the weakest. Their advocacy of free higher education runs against the studies that show that the best investment in education is at the pre-school level and not the upper end. The NDP does have some interesting and less discriminatory programs to boost the safety social net and particularly child care programs. The Liberals are the only ones planning to increase taxes – on the rich – and its plan to build new infrastructure with a low deficit/GDP ratio is attractive. All the Tories offer is slow growth and poor prospects for creating new jobs.

The Harper Conservatives as good stewards of the economy! It is a joke.

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