Sunday, February 26, 2006

Conservatives Risk Deficit

I can't remember the last time I read an article, outlining the risks of deficit spending. Finance Minister Jim Flaherty has some juggling to do, fulfilling the litany of Tory promises and balancing the books:

But analysts warn that economic growth won't generate enough cash to fulfil the lengthy list of demands, particularly as the costs rise...

Meanwhile, under pressure from premiers, Harper's government has agreed to extend until March 2007 the existing Liberal child-care plan - an unexpected new cost of about $700 million, according to estimates by the Conference Board of Canada.

Another whopping expense in the first Conservative budget will be the promised percentage point cut to the Goods and Services Tax, a move that one analyst reckons will cost $700 million more than forecast in its first year alone...

It's obvious the new finance minister has very little discretion over the next several years," said Dale Orr, economist with forecaster Global Insight.

"The Conservative fiscal plan of election 2006 exhausted virtually all fiscal surpluses in sight."

He calculates that the GST cut alone will cost Ottawa about $5.2 billion in foregone revenues every year, considerably more than the Tory forecast of $4.5 billion.

The Tories calculated a surplus of 1.7 billion for the coming fiscal year. Now factor in the extra 700 million for childcare, the extra 700-900 million for the GST cut and the warnings of cost overruns on defence. How do the Tories plan to make up the difference? Raising taxes, primarily on the poorest Canadians:
Watch for higher personal income taxes as the Conservatives cancel previous Liberal tax cuts to pay for their GST reduction.

"It (the GST cut) is their big initiative and it doesn't leave them a lot of room to do other things," said Rick Egelton, chief economist with Bank of Montreal.

About $2.7 billion can be found next year by canceling a Liberal tax cut that reduced the lowest marginal tax rate to 15 per cent from 16 per cent, calculates Orr.

What a disgrace, if the Conservative need to balance the budget by raising the lowest tax rate. The GST cut benefits all??? Analysts are also warning the Conservatives against rosy optimism in their revenue predictions. The Liberals were notorious for "worst-case scenario" budgets, lowballing the surplus numbers. While the Liberals took some heat for this approach, I think it was prudent management to operate with low figures. The Conservative approach leaves no space if projections aren't met, and the consequence will be a deficit. The fact that, despite robust growth, we are now discussing deficits is staggering.


James Bowie said...

Good post.

Alternately, Harper could write the first balanced conservative budget of my lifetime.

Has there ever been one?

Steve V said...


Good spin, a balanced budget represents progress.