Flaherty has little room to run in tomorrow's budget

The finance minister made his big tax cuts in last fall's economic statement

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The Gazette, Monday, February 25, 2008

On the stairway outside the House of Commons a few weeks ago, Finance Minister Jim Flaherty ran into a friend from high school days in Montreal.

"Just going up to see the boss about the budget," he said.

"That'll be a short conversation," Flaherty was told. "You gave it away on Halloween."

Flaherty did not disagree. Anticipating an election last fall, the minority Conservative government rolled most of its tax breaks and goodies into the Oct. 30 economic statement, a budget in all but name, leaving very little on the shelf for tomorrow's budget.

For example, the second point of the GST reduction from seven to five per cent, was promised within five years. There was no hurry to put it in an economic update less than two years later.

In doing so, effective Jan. 1, the government deprived itself of $6 billion in revenue this year that could have been packaged as a personal-income-tax cut in the run-up to an election some time in 2008.

Instead, and exceptionally for an economic statement, the government trumpeted "broad-based tax relief for individuals, families and businesses," in what it boasted of as a "tax-relief package." It was an impressive package, but it was more about the packaging.

With the two-point reduction in the GST, a family buying a $300,000 home would save $3,840. A family buying a $30,000 minivan would save $600. A family buying a $10,000 boat for the cottage would save $200. And so on. Promises made, promises kept. Part of a checklist, from one election to the next.

There was more. Income tax relief in 2007 and 2008 would remove nearly 400,000 Canadians from the tax rolls. The threshold for paying tax would rise to $9,600 last year and this year, rising to $10,100 in 2009.

Families earning $50,000 would pay $400 less tax this year. Families earning $100,000 would pay $600 less.

For businesses, the corporate tax rate was reduced by one per cent this year, and will be reduced by five points by 2012, from 22 per cent in 2007. The reduction of corporate taxes will leave Canada with the lowest corporate taxes in the industrialized world. This was a major incentive to business investment, and to Canada's long-term competitiveness.

Altogether, the government boasted then, it would have reduced the tax burden by $190 billion to 2012, leaving Canadians with the lowest tax levels in nearly half a century.

And while they were at it, the Conservatives paid down an additional $10 billion in debt, which speaks well of the virtuous cycle but gave Flaherty that much less to put in the window tomorrow.

It isn't just a question of goodies, there's also a question of whether the Canadian economy might need some stimulus to counter the effects of the high-flying loonie on exports, as well as the economic slowdown in the U.S.

But while the surplus appears to be shrinking, it hasn't yet disappeared. Ottawa is still awash in taxes from the booming energy sector. The economy, surprisingly, added 46,000 jobs in January. With unemployment at 5.9 per cent, a record number of Canadians are working and paying taxes.

In Washington, the Bush administration and Congress rushed through a $150-billion stimulus package last month in direct payouts to taxpayers. But George W. Bush also sent Congress a budget with a $400-billion deficit. By the time he leaves office in January, the United States will have taken on another $2 trillion in debt--the equivalent of nearly two years of output of the entire Canadian economy.

Since the Canadian budget was balanced in 1997, no government in its right mind would propose going back into a deficit. It's no longer an acceptable outcome in this country.

And with this economy, there's no need to even consider it. So absent a stimulus package, there won't be any significant new personal or corporate tax cuts in the budget.

There might be some tinkering on the margins - say, an increase of funding for post-secondary education, or a renewal of the Millennium Scholarships. But nothing in the way of a big bang.

The government will call this staying the course. The opposition will call it a do-nothing budget. But it's only when the vote on the budget occurs next week that push will come to shove.

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