Federal Budget 2010

It's tradition here at CAtO to discuss the federal budget, but I don't have a lot of enthusiasm for the task this year.

At the macro level the story is simple. The ill-advised reduction of the GST from 7% to 5%, combined with corporate tax cuts means that federal government revenue is smaller than it has been ever since public health care was introduced. The shortfall in revenue means that we're running a 'structural' deficit, meaning that over the course of good times and bad, we can expect the government to keep piling up debt. Naturally in the current bad times this means we're running up debt really fast.

Here's a chart I stole from Stephen at Worthwhile Canadian Initiative that shows revenue and expense for the federal government over time, although it hasn't been extended to show the 50 billion deficit for the current year.



(oh, in case anyone wants to argue that 'percent of GDP' is not the right measure to use, please read this post, also from Worthwhile Canadian Initiative, first, thanks)

You didn't have to be a genius to know that the Conservative party would make a mess of our finances, here's what I wrote in 2006, in a post entitled, 'Good-Bye Budget Surplus, We Hardly Knew Ya'

"The reasoning why neo-Conservative governments are prone to running large deficits is fairly straightforward ... if the Conservatives take power, the various Conservative factions (social conservatives, red tories, libertarians, etc.) will then start battling with each other to get their agenda implemented. In order to keep the party together, the Conservatives will have to try and focus on areas of agreement.

For a number of reasons, running a deficit makes this a lot easier. For one thing, it allows the government to painlessly (except for the interest we pay for the rest of our lives) bring in a tax cut, which pleases all factions of the Conservative party. In fact, tax cuts are probably the only thing that all the Conservative factions agree on, which in itself goes a long way to explaining neo-Conservative deficits.

Another factor is that Conservatives generally have an anti-government mindset and often believe that government is just some black hole which sucks up money and does nothing. This leads them to believe they can make significant cuts to government and they won't have any impact. Once in power, much like your typical hapless reality show contestant, they realize that governing is harder (and more important) than it looks and they don't end up making the cuts they thought they would (or they do and people end up dying - see Walkerton).

This is compounded by the fact that Conservatives generally count rural and agricultural communities among their supporters and these communities tend to be both the strongest in their anti-government rhetoric and also in the fierceness with which they defend any government handouts they receive.

But surely, you say, Conservative supporters are fiscally conservative and will turn against their party if it runs deficits?

The practical response is to note that said fiscal conservatives, who can be counted on to scream loud and long if a left-wing government runs a deficit, have historically remained eerily silent in the presence of Conservative deficits.

Finally, there are a number of Conservatives (especially libertarians) who like deficits because they realize (correctly) that running deficits is one of the most effective ways to cripple government. As more and more tax dollars goes to interest payments, people see less and less benefit to their tax dollars, and support for government decreases. As an added benefit, when the deficit creating government is finally defeated, the new government that takes over will have to focus their energy on reducing the deficit, making unpopular cuts rather than implementing their agenda.

...if I was betting man, I'd bet that a Conservative government which lasts more than 2 years will put us in deficit sooner or later."

In terms of new measures in the budget, there's really almost nothing there, which admittedly does make it puzzling how it ends up being 150 pages or so. True, the Orwellian/technocratic language does drag things out with what could have been a concise, "We're selling AECL" turning into, "The Government has initiated a restructuring process with respect to AECL to attract new investment and expertise, position the corporation for success in a changing global marketplace and create new opportunities for Canada's nuclear industry" but still.

In dollars the biggest changes are the closing of a tax loophole for stock options that will save the government an estimated $300-$400 million dollars a year and cuts to some industrial tariffs that will cost $200-$300 million dollars a year. I guess that few will argue against collecting money from wealthy tax cheats instead of from taxes on importing industrial equipment.

This editorial from the Toronto Star, "Federal Budget: Wait Till Next Year" seems like the best summary that I have read. It seems as though the Conservatives are planning to try and win an election some time in the next 12 months and then cut spending after they (they hope) win the election. Of course, the smart thing to do would be to raise taxes, not cut spending, but in this era, being Conservative means doing the easy thing, not the smart thing.