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RM Issue #030624

Surpluses built on taxpayers' backs
Neville Nankivell National Post, Saturday, June 21, 2003



Prime Minister Jean Chréetien brags that under his government Canada has shown the world the way to prosperity. That's the message he pitched to this year's G8 summit, telling world leaders Canada's federal budget deficits had been slain, interest rates are low, employment growth strong, the economy robust. But hold the applause.

We have not been performing as well as some other major economies in other key yardsticks such as relative tax burdens, unemployment, labour productivity, public debt loads and attracting foreign business investment. We'll need to make a lot more progress in these areas to ensure higher living standards in the years ahead.

With a string of budgetary surpluses since 1997, Canada has done better in remaining free of deficits than major economies such as the United States, Japan, Germany, France, Britain or Italy. But as Canadian economist Dale Orr points out in a recent report, this is mostly because our taxes have remained comparatively high.

In terms of all levels of government (federal, provincial, municipal), Canada's overall tax burden this year will be an estimated 37.5% of GDP compared with 40.5% in 2000. But even with recent federal and provincial tax-reduction measures, this will still be eight percentage points more than the United States, compared with nine points three years ago.

"That's very marginal progress," says Mr. Orr, managing director of Canadian Macro Services for Global Insight (Canada), Toronto. He notes that if Canada's tax burden were reduced to the U.S. level, we would have a relatively much larger budgetary deficit than our neighbour to the south.

In other words, our government budgetary surpluses have been racked up on the backs of Canadian taxpayers. They have not been achieved through harder choices such as eliminating ineffectual and wasteful public expenditures -- of which there are plenty.

In the fiscal year ended March 31, latest figures show federal government program spending was up 5.3%, which is quite a jump. But the government's spending totals will be even higher when year-end adjustments are completed. These will include billions of dollars for initiatives in the February budget which have not yet been charged to the fiscal 2002-2003 books.

In some areas last year, there were some particularly sharp spending increases. For example, subsidies to the agricultural sector were up 75%. Health care transfers rose 7.5% (not including the $2.5-billion supplement in the February budget). Payments to the CBC increased 7%.

Payments to other government-owned Crown corporations were up by 9.5%.

Meanwhile, despite the tax-reduction plan for individuals and businesses that the government embarked on three years ago, federal tax revenues for fiscal 2002-03 were much the same as the year before. With large increases in GST revenues, import duties and other excise taxes and duties, total federal tax revenues were down only 0.3% to $165-billion.

Canada has had strong employment growth in recent years, but lately this trend has faded. In May, the jobless rate shot up to 7.8% from 7.5% -- its highest since early last year. The U.S. unemployment rate also rose in May, but at 6.1% is lower than ours. Britain's jobless rate is 3.1%, a 28-year low. Australia, Japan and a clutch of European countries are at 6% or lower.

Most disturbing is Canada's lagging productivity growth. The Ottawa-based Centre for the Study of Living Standards estimates that last year Canada's output per person employed was only 81% of the U.S. level (measured in U.S. dollars). This was the biggest gap since the late 1960s.

And latest figures show our labour productivity has just fallen again for the third quarter in a row.

Measured by the usual yardstick of income per capita, our standard of living remains about 20% below that of the United States. The productivity performance of several European countries and Australia has also been outpacing ours.

Canada has also been trailing many other economies in attracting inflows of foreign business investment. These were down about 20% last year, while in Australia they tripled. Our share of global foreign business investment has been slipping now for more than a decade. This should be a major policy concern. Cross-border business investment often brings with it state-of-the- art technology, research-and-development commitments, managerial expertise and important trade-expansion linkages. This helps improve productivity.

It's true that our government finances are in much better shape now than 10 years ago, but a major chunk of our tax dollars still gets eaten up by public debt charges. While these have been declining, our public debt burden remains relatively higher than the United States. Many economists also think that as the recent big U.S. tax-cut package starts to kick in, its economy will outperform us again in terms of GDP growth.

Further tax cuts in Canada for individuals and businesses would encourage greater economic activity and faster job growth. They would also force our governments to be more prudent about their expenditures.

Politicians are inclined to spend whatever their governments can rake in.

At the federal level and in some provincial jurisdictions, government spending is whirling out of control again. If not reined in, this will put our recent economic and financial advances in jeopardy.

© Copyright 2003 National Post



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