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The Canadian Institute of Chartered Accountants (CICA) is urging the Stephen Harper government to exercise much greater fiscal restraint than has been wielded over the past decade.
Addressing the federal finance committee’s pre-budget hearings recently, CICA president and CEO Kevin Dancey blasted the government’s previous spending habits. He noted how in 2004-05, for instance, spending increased 15.1 per cent to hit nearly $200 billion.
“Continued increases in spending at this level will threaten debt reduction and make tax relief more difficult to achieve,” Dancey told the committee.
Had the federal government “kept program spending at the rate of inflation since it began posting surpluses in 1997, today we would see very different results,” including a much reduced federal debt of $406 billion, rather than the $481.5 billion today, Dancey said. And instead of being seven years away from meeting its debt-to-GDP target ratio of 25 per cent, the government would now be only a year away from achieving that goal, he added.
Dancey acknowledged that, in spite of the spending behaviour the CICA is criticizing, which has often greatly exceeded inflation adjusted for population growth, budgetary surpluses have been maintained and taxes continue to be reduced. And he reacted favourably to the government’s sudden, unexpected news the day of his presentation that it had an extra $13.2 billion to pay down the national debt.
The CICA is also “encouraged” by the federal government’s announcement it will reduce and reallocate $2 billion in spending, although Dancey tampered his enthusiasm with a dose of cautious optimism. “We hope the government is on the right track to control program spending,” he said. But “we’ll have to wait and see if these government cuts meet our recommended targets of spending to inflation, as adjusted for population growth.”
Dancey said it has taken external factors such as a growing economy and continued low interest rates to keep the economic numbers positive. “Without a growing economy and low interest rates, who knows what the surplus or deficit would have been?” he told the Bottom Line.
Don Drummond, senior vice-president and chief economist of the TD Bank Financial Group, doesn’t buy that argument.
“I have limited sympathies for those that trot out the deficit fear. Frankly, if we had a $1 billion deficit, it is not a material event from a fiscal perspective,” he says. “I think there’s enough cushion in the system, and we’d have to have a pretty harsh economic outcome to push the government back into deficit.”
The CICA also recommended that the federal government become more aggressive in terms of paying down the debt, by committing to a minimum payout of at least $5 billion, rather than $3 billion annually toward debt reduction. It also wants the government to reduce its debt-to-GDP ratio to 20 per cent, rather than 25 per cent, by fiscal 2014. The long-term benefit of such restraint could extend up to 30 years, particularly with an aging population and a large number of baby boomers scheduled to retire, Dancey told the committee.
Ellen Russell, senior economist for the Canadian Centre for Policy Alternatives in Ottawa, a think tank that examines both social and economic issues, is critical of formulas designed to hold spending to a set amount, calling them a “fiscal straight-jacket” that could prevent the federal government from being able to adapt to “prevailing conditions.”
If, for instance, the military required funds in excess of inflation adjusted for population growth, the federal government would have to compensate by decreasing their spending in other areas below inflation, including areas that need increases, she says.
Moreover, there could be a situation surrounding expenditures for, say, Aboriginal issues, involving people whose population is growing faster than the national average, which the federal government might lack the flexibility to take into account, Russell points out.
Another key focus of the CICA was on corporate tax reduction. He cited the example of Ireland, a “Celtic Tiger” in his view because it has cut its corporate tax rate to 12.5 per cent and “succeeded by making itself one of the most hospitable countries in the world for trade and commerce.” The institute wants to see Canada follow aggressively down the same path.
The CICA report recommended the federal government “immediately eliminate the corporate surtax and accelerate planned reductions to corporate tax rates,” rather than wait until 2008 and 2010, respectively. It also recommends that the government “commit to further reductions in general corporate tax rates, to bring them closer to the rate for small business.”
Although he didn’t have any specific figures in mind, Dancey emphasized in an interview with the Bottom Line that in order to be make a difference, the cuts “have got to be significant” and that “you’re not going to win by just playing around at the edges” such as cutting one or two percentage points. But “even if it got down to something like 14 – 15 per cent,” that is at least going “in the right direction,” he said.
Drummond agrees that corporate tax cuts ought to be a priority, but only to a point. Once rates get down to about 16 or 17 per cent, then “very high marginal personal income tax rates” need to be addressed, he believes.
Dancey told the committee that while “personal income tax has remained virtually unchanged as a percentage of budgetary revenue over the past decade, corporate income tax has risen steadily” to the point where it now sits 1.5 per cent above its 10-year average. And that hurts more than corporate growth, he emphasized.
“It is a fallacy to think that companies bear the burden of the taxes they pay. The burden falls on real people, real citizens,” he said, resulting in reduced capital stock, less capital per worker and lower wages – a pattern that gets “intensified in a global economy, where capital moves easily from high-tax to low-tax countries.”
Niels Veldhuis, associate director of fiscal studies at the Fraser Institute, a think tank headquartered in Vancouver, agrees that “corporate tax reductions should be near the top of the agenda.
“One of the reasons we don’t get the type of productivity growth other countries do is because we don’t get the investment that other countries do. And if you follow that through one of the reasons we don’t get the investment is (because) we have these very high rates of taxation on capital,” Veldhuis adds.
The CICA’s written submission also focused on capital cost allowance (CCA) rates, calling for such rates to be “better aligned with economic life” and claiming that CCA rates in many classes, particularly with respect to manufacturing and technology, are too low.