Friday, July 17, 2009

Budget Officer: Tax hikes or deep spending cuts necessary for surplus budget

This is exactly what the Conservatives do not want to hear. Flaherty unrealistically thinks that natural revenue growth when the economy turns around will put the budget back into the black. Given the choice between tax hikes and program cuts no doubt the Conservatives will cut back social programs claiming it is all those " entitlements" that cause the deficit and have to go.
This is from the Vancouver Sun.

Tax hikes, spending cuts needed for federal surplus: budget officer
By David Akin, Canwest News ServiceJune 12, 2009
OTTAWA - Parliamentary Budget Officer Kevin Page says tax hikes or deep spending cuts are the only way the federal government's finances can return to a surplus position.

Page is the latest economic expert to suggest Finance Minister Jim Flaherty's plan to eliminate the deficit is unrealistic.

``Based on our analysis, even the analysis we did a few months ago, it will be very difficult to see a surplus within the next five years without significant discretionary actions,'' Page said in an interview with Canwest News Service and Global National.

Flaherty, on the other hand, believes the natural growth of tax revenues when the economy returns to normal growth will be enough to clear the deficit.

``As we come out (of recession) and the revenues get better, as they will, as the economy starts to grow, we will be able to work our way out of deficit, into surplus,'' Flaherty told reporters before leaving for Italy to attend meetings this weekend of G8 finance ministers.

But Page said the Canadian economy is experiencing ``massive structural changes'' and, even when the recession ends, growth rates likely will be slower than Flaherty has predicted. Page cites the changes in the auto and forestry sectors as examples.

``It may be that our potential growth rate is lowering, and we need to look at that,'' Page said.

Page's comment echoes a report released last week by The Toronto-Dominion Bank, which predicted that the federal government will still be running an annual deficit of more than $19 billion in five years. TD, too, sees persistent deficits, because post-recessionary growth rates will be muted.

The Parliamentary Budget Office has been asked by the House of Commons finance committee to prepare its own five-year fiscal forecast by July 6, and Page believes that forecast, like TD Bank's, will show the government to still be in deficit in five years. In the January budget, Flaherty said Ottawa would balance the books by then.

``We haven't made any change in that plan,'' Flaherty said, following Thursday's budget update. ``In the fall, we'll do an economic statement, as we usually do, and assess the situation where we are then, but we're maintaining our plan to watch the economy be stimulated, and then come out of deficit and move into surplus and pay off the interest or the deficit that we're incurring now.''

Page thinks more will be required.

``We don't think it's realistic. We think discretionary actions would be needed to get the deficit back to balance within a five-year period,'' Page said.

But Page said it may not be necessary to be back in surplus in five years. The appropriate timeline, he will tell MPs, is one that ensures the economy returns to normal growth, and that could take longer than five years.

Whenever the decision is made to bring the government out of deficit, Page believes the government of the day will need to make some ``hard decisions'' to eliminate the deficit: make massive program cuts or hike taxes.

.....program spending by Ottawa has grown an average of five per cent each year, or about $10 billion annually. This year, because of stimulus spending and other measures forced upon him by the recession, spending will skyrocket by an estimated 14.5 per cent, or nearly $35 billion.

Page and many other economists say the best way for Ottawa to restore fiscal balance once the economy has fully recovered in four or five years, is to raise a consumption tax such as the GST. A one percentage point hike in the GST would add about $7.5 billion a year to the federal treasury and do the least economic damage, they say. ..........................................................

Harper government spending record

2006-07: +$13 billion (+6.9 per cent)

2007-08: +$11.2 billion (+5.6 per cent)

*2008-09: +6.8 billion (+3.3 per cent)

*2009-10: +34.9 billion (+14.5 per cent)

Source: Department of Finance. Compares all government spending minus public debt charges.

*Finance Department estimate.

© Copyright (c) Canwest News Service

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