In January the Parliamentary Budget Officer (PBO), Kevin Page, explained that the deficit had become structural, meaning it’ll keep existing when our economy is back up to snuff (if it gets there). I’ll have more to say about the budget another time, but consider an element in what happened today, the decrease of corporate income taxes.

The Globe and Mail’s John Ibbitson explained¹ (4 March 2010) that Harper is determined to eliminate the deficit by 2015. Of course, we know that Jim Flaherty presents this as happening largely through an upbeat economy, one that grows so well he doesn’t have to raise taxes and simply must prevent spending increases. But this message has been somewhat confusing. Flaherty used to talk about not allowing spending to grow. Later the Conservatives appointed Stockwell Day as the man to make cuts. Their messaging seems to vacillate between limiting spending growth and making cuts. They certainly aren’t going to raise any taxes.

The CBC reported³ (4 March 2010) on Flaherty’s perspective

“The government’s plan to get ahead of its $54 billion deficit is built largely on the back of $17.6 billion worth of savings over the next five years that will come from streamlining and reducing the operating and administrative costs of government departments. That plus a broadening tax base as the economy improves will be enough to bridge the gap, Flaherty said.”

Ibbitson reminds us early, what the PBO reported: the deficit is structural and regardless of Flaherty’s optimism, it’s very unlikely to go away as Flaherty says.

Now, switching topics a bit, Ibbitson writes

“With costs rising by 2.5 per cent a year, after accounting for inflation and population growth, health care is consuming nearly half of the budget in some provinces, even as the baby boom heads into retirement. Canadians need to confront the truth that the health-care system as it exists simply can’t be sustained.

“The federal government will be under intense pressure from the provinces, who will not be able to make ends meet because of the explosion in health care spending,” warns Pierre Fortin, an economist who teaches at the Université du Québec à Montréal. “The provinces will always be at the door, asking for more money.”"

I think this is significant commentary. Take stock, a structural deficit is established, and now the Conservatives are on track to further decrease the amount of money the government takes in by reducing corporate taxes even more than they already have. According to page 67 of the budget² (and mentioned throughout)

“The federal general corporate income tax rate was reduced to 18 per cent on January 1, 2010. It will be further reduced to 16.5 per cent on January 1, 2011 and to 15 per cent on January 1, 2012.”

That means Canada will have the lowest corporate income tax rate in the G7. The hope is that that will attract more investment. But at what cost?

Losing the federal surplus meant we lost our safety buffer. If something unexpectedly worse occurs than this recession, which we seem to be leaving, we’re in trouble. But that’s a big if. The heart of the worry here is that faced with the inevitable stresses of both the health of an aging population and the fact that there will be fewer people generating revenue for the government, now the government is giving itself further stressors by decreasing another source of revenue, corporate income taxes. Even in good times, that means there’s less the government can do to promote Canadian well-being.

So why do this? Are the Conservatives making a big gamble that the economy is going to improve so much, our worries of greater problems will not come to pass? Or are they being irrational? I don’t think they’re gambling or being irrational. They’ve calculated exactly what’s needed to bring about a widespread crisis in the government’s ability to fund the programs we expect. The Conservatives need to bring about a crisis in order to implement their vision.

A crisis makes arguments for drastic change seem required, people react. And after gradually being lulled into a low-tax stasis without much effort, it will be easy for Conservatives to make the degraded services around us seem unworthy of funding. It’s much harder to rebuild something anew than to maintain and improve upon what is working well. I can just hear the arguments “look at the state of health care, our equipment is useless, we don’t have the staff, etc. clearly the public option doesn’t work!” of course forgetting that it can work quite well when funded and operated properly. People will just see it in crisis state.

A government lacking the funds to do much, is one that cannot ensure health care and social services to its people. Indeed, when our health care system is so far extended beyond capacity, watch, the Conservatives will argue that the only solution is to bring in the private sector. And health care is only one example, there are many other government services that will suffer similar fates probably even sooner.

(P.S. I remember a time not long ago, when one of the arguments for doing business in Canada was our health system. The argument went something like, without companies having to foot the cost of health insurance, like they do to some degree in the US, an expense is saved along with a lot of bureaucratic work that doesn’t have to be done. Cut back on your HR team! More efficient employees because they’re healthy and on-the-job! That kind of stuff. If the Conservatives’ budgeting steps really do cause the crisis I’m suggesting they’re designed to, we’ll see what happens to this little bit of persuasion.)

CBC News reported¹ (13 January 2010) on the PBO report. The CBC article describes a structural deficit as “…a portion of a country’s budget deficit that exists even when the economy is running at full capacity during a period of expansion.” Which is important to keep in mind when listening to Conservative Finance Minister, Jim Flaherty, explain that future economic growth will be an important contributor to ridding ourselves of this deficit.

Page’s just-released report² Estimating Potential GDP and the Government’s Structural Budget Balance (13 January 2010) states a number of interesting points. Right upfront it points out the worry in accepting the Flaherty-growth-justification.

“It’s unlikely that future economic growth will be able to alleviate the deficit.PBO’s estimates suggest that the Canadian economy was operating significantly below its potential in 2009. More importantly, PBO’s estimates also suggest that the downward trend in potential GDP growth observed since 2000 will continue over the projection horizon, averaging 1.9 per cent over the 2009 to 2014 period. The projected decline in potential GDP growth is a function of the projected decline in the growth of trend labour input, which reflects slower growth of the working age population and a decline in the trend employment rate associated with the shifting age composition of the workforce.”

Lest anyone is tempted to argue the PBO and Conservative government form their estimates through different accounting frameworks, the PBO report makes an interesting statement on its method. It notes that the frameworks are different but shows that its method nevetheless almost always produces results that since 1976 are strongly correlated with Finance Canada’s. It only recently began to diverge, as in, when the Conservatives took over and tried to paint a more rosy picture of their budgeting. Here’s a snapshot of that portion of the report.

“Despite the differences in accounting frameworks, calendar/fiscal years, and methodologies, Finance Canada and PBO’s estimates of the Government’s structural balance track each other closely over history (the correlation coefficient is 0.96). However, since 2006-07 (calendar year 2006) when the structural balance was estimated at $8.8 billion by both Finance Canada and PBO, the structural balance estimates appear to have diverged. Indeed, in 2008-09 (calendar year 2008) Finance Canada estimates a structural surplus of $13.8 billion while PBO estimates a $3.2 billion structural deficit.”

An article on the subject in The Globe and Mail³ (13 January 2010) said

“…even if the government successfully shuts off the taps on all stimulus spending by 2011 and keeps government growth below four per cent, it still will not have enough money coming in to erase the deficit. As a result, Mr. Page said there will be a structural deficit of $18.9-billion in 2013-14, which is the period when Ottawa expects to be narrowing in on a balanced budget.”

Since the report essentially rules out the possibility that economic growth could cover the deficit or even return us to non-deficit status, the other most obvious options are to either increase taxes or cut services. I don’t think it takes much effort to imagine the direction the Conservatives will go with that choice. They’ve already proven their propensity toward cutting taxes even when there isn’t good reason to do so, and repeatedly said they want to cull the government programs and services that help define the wellbeing of our society. Indeed in the same Globe and Mail article, it says

“Mr. Flaherty has said that if economic growth comes in lower than expected, savings can be found by not renewing government programs that have a set end date.”

Flaherty and Harper have been talking this way quite a bit. They’ve been chomping at the bit to cut government programs since they came to power. I’ve argued in the past that the Conservatives engineered much of the deficit specifically to create a rationale for cutting programs. Unfortunately many of those programs are important to our present well-being and our future growth, for example the recently cut CCL.

A larger portion of the population is heading toward retirement (particularly over the next few years). Additionally the global economic downturn means more people in Canada need assistance through programs such as unemployment insurance. Taken together that means the government receives less money in taxes but simultaneously has a greater responsibility to provide to social programs.

Finally, the rather more severe Toronto Star⁴ (13 January 2010) quoted Page

“We are going to have to take drastic measures, either spending reduction or tax increase, to get us back to balances… The question is, do they (the Conservative government) want to make short-sighted decisions or long-sighted decisions?”

The article continues to relate Harper’s lack of worry about a structural deficit and a debt-interest payment trap. It notes that during the 1970s/80s (the last time there were large deficits) Canada had to spend $.35/dollar on public debt interest charges.

(Update: I found an article from Reuters⁵ 13 March 2009, in which Harper talks about seeing a surge in the jobless rate. However, he comments that “It doesn’t change our assessment that when the global economy does recover, all the demographic indications are that we will have labor shortages.” He’s thus recognized for a long time, the demographic trend toward having a smaller total workforce–inline with the problem of a smaller tax intake.)