Swelling surplus heightens tax cut hopes

Notice the manner in which the issue is framed: in terms of tax cuts. Surpluses could be used to increase social spending, infrastructure spending etc. Ironically even debt reduction something that used to be a cause celebre for conservatives is not mentioned. Debt reduction probably doesn't buy many votes. Neither does public or co-operative housing initiatives or even repairing our decaying transportation infrastructure.
Traditional economists are a type of latter day theologian with a flair for abstract mathematical models that buttress their great faith in free markets, and analyses that omit social factors. For example the GST is a regressive tax impacting relatively more on the poor especially when placed upon necessities than on the well off. This is ignored when economists criticise the Conservatives for reducing it. Sales taxes are regressive whereas a properly graduated income tax is not.

Swelling surplus heightens tax cut hopes
Ottawa has capacity to offer $10-billion in relief, bank says
STEVEN CHASE

October 27, 2007

OTTAWA -- Ottawa is again awash in cash and shows signs of being on track for a budget surplus exceeding last year's windfall of nearly $14-billion, analysts say - a prospect fuelling expectations of big federal tax relief in the near future.

"Once again, they're raking it in," Toronto Dominion Bank chief economist Don Drummond said.

Based on his bank's forecasts, he estimates the Harper government has the fiscal room to offer Canadians at least $10-billion in annual tax cuts - an estimate he acknowledges is cautious.

Depending on how Ottawa slices the pie, this could mean hundreds of dollars in breaks for individual Canadians: relief expected to come either in the looming fall fiscal update or an early 2008 budget.
These predictions come as the federal Finance Department revealed yesterday that it's running an $8.7-billion budget surplus five months into the fiscal year, $1.5-billion ahead of where it stood one year ago.

Canadian Taxpayers Federation head John Williamson said if Ottawa keeps accumulating revenue at this pace, the surplus could hit $20-billion, which would break the record of $19.9-billion in 2000-2001.

Mr. Drummond expects the federal government is headed for a surplus of at least $12-billion to $15-billion, although he said it's not improbable it could be higher.

Surging corporate tax revenue is swelling Ottawa's coffers. It's up $2.8-billion or 23.2 per cent in the first five months of this fiscal year over the previous April to August.

Ottawa is still benefiting from red-hot prices for many resource commodities that Canadian companies sell, including oil, which recently hit record highs. It's also reaping more because tax-loss pools that allowed the oil patch to reduce taxes paid are drying up in the face of rising crude prices.

The strengthened Canadian dollar - up more than 17 per cent this year against its U.S. counterpart - has actually prevented Ottawa's tax revenue take from being even fatter because it has made exports more expensive and crimped sales for manufacturers.

All this excess cash could embarrass the Conservatives, who vowed to end such massive windfalls, and forecast a surplus of only $3.3-billion this year.

But it also gives federal Finance Minister Jim Flaherty more fiscal room to offer the tax relief the Tories have been promising for weeks, possibly as early as the imminent fall economic statement.

The Conservatives have been debating internally whether to dole out tax relief in the update, expected as early as next week, or roll all reductions into a big 2008 budget package.

Senior economists, who met Mr. Flaherty privately yesterday, urged him to reduce personal and corporate income taxes, but warned him off the Conservative promise to cut the goods and services tax by another percentage point.

The Tories cut the GST by one point to 6 per cent in mid-2006 and this month renewed a vow to reduce it to 5 per cent as promised in the last election campaign.

But economists say the cut would be wasted. They consider consumption taxes, such as the GST, the least evil among taxes because they're the least damaging to economic growth.

Global Insight (Canada) chief economist Dale Orr said Mr. Flaherty should delay a GST cut until he gets a deal with provinces that have yet to harmonize their sales taxes with the federal levy. Harmonization would mean those provincial taxes no longer cover capital goods such as machinery and tools and would be a break for business.

A tax cut of $10-billion would not go as far as it might seem in terms of guaranteed relief to Canadians, especially if the Tories cut the GST.

If every one of the 15.8 million tax filers who pays taxes received an equal share of the $10-billion in relief, it would work out to $632 each.

But a GST cut would cost Ottawa about $5.5-billion, leaving $4.5-billion for income tax cuts. And the relief felt by a GST cut would depend on how much a person purchased.

Plus, the Tories have promised corporate tax relief, and economists estimate that a meaningful break for business would cost at least $1-billion.

This further shrinks the available pool of tax relief for taxpayers to $3.5-billion, which would work out to $221 each.

Mr. Flaherty is also weighing a plea to extend a temporary tax break for manufacturers hit hard by the rising dollar that has driven up the price of their exports. Canadian Manufacturers and Exporters president Jay Myers said he's expecting action in the fall update on the measure, which allows rapid writeoffs of investments in manufacturing and processing equipment

Surplus budgeting now framed as taxpayer benefit

What was bad under the Liberals becomes good under the Conservatives. In both cases the surpluses would allow more social and infrastuctural spending but it does not seem to be used for that. I find it a bit odd that having a surplus is bad fiscal management. It is surely a benign mistake and the surplus allows the govt. to fund discretionary programs that it might have cut earlier. Of course the Conservatives do not use surpluses in that manner since they are for smaller govt. and less govt. expenditure...oh except for crime and the military. THis is from the Harper Index.

Surplus budgeting now framed as taxpayer benefit

"Surprises" once scorned, now provide excuse to avoid social spending.

Last week finance minister Jim Flaherty released the Annual Financial Report for 2006/07, revealing a federal budget surplus of $14.2 billion. For years the the Conservatives condemned Liberal surpluses as phony surprises. So the irony of the Conservatives bringing in a surprise surplus was not lost on observers. News reports contrasted old clips of Stephen Harper on the subject with what the government said last week and can be expected to say in the throne speech.

While campaigning in 2005, Stephen Harper said "When surpluses appear out of thin air, I think that's a sign of bad fiscal management or, even worse, dishonest fiscal management," Dan Cook reminds Globe and Mail readers. In 2007 Harper claims his own surpluses are a result of "sound management".

Reports focused, as well, on the Conservatives' pledge to put any surpluses into debt retirement and to use the reduction in interest payments to fund new tax cuts.

Putting the surplus against the debt will reduce income taxes by $700 million annually, writes economist Erin Weir of the Canadian Labour Congress. "This tax cut will barely put a dent in federal income taxes, which generate nearly $110 billion per year."

Weir estimates the savings per taxpayer of about $35. "They would have cut income taxes by that amount anyway."

Less attention, however, was given to the costs of this large surplus.

"As in years past it means that social and environmental priorities, like fighting poverty and homelessness, or meeting the challenge of climate change, have been left off the table by deliberate understatement of available surpluses," writes Marc Lee of the Canadian Centre for Policy Alternatives in Vancouver.

"Even if you accept that this was a 'surprise' there is no reason why that money (perhaps with the exception of the $3 billion committed to debt reduction in the original budget) could not be put into a fund for capital projects (social housing or transportation infrastructure, perhaps) or even into a fund that would support future operating expenditures (for, say, early learning programs)."

Weir says "In view of the fact there are these pressing unmet needs for social services, this inaccurate forecast is not only depriving programs of needed money but also stifling a democratic debate about how to use fiscal capacity that is available for the government."

Weir writes that the Conservative pledge to return interest saved on debt reduction could be, at worst, "an inappropriate constraint on future budgets."

He is concerned that this pledge, combined with a commitment adopted by the Jean Chrétien Liberals to repay at least $3 billion of debt annually, "effectively mandates a corresponding minimum level of income-tax cuts in every budget regardless of changing fiscal circumstances. If future revenues are less than projected, the government might 'need' to cut spending in order to fulfill its 'guarantee'."

He believes surpluses like these are deliberately engineered. "The fact the error is always in one direction and pretty far in that direction suggests forecasts are being done in such a way as to understate surpluses," he told HarperIndex.ca, citing a group of independent forecasters who came to that conclusion a year ago in a study.

"The government's messaging is to connect the dots between debt repayments and tax cuts," said Weir. "The Conservatives were very critical of the Liberals over surpluses. Now that the Conservatives are doing the same thing they're trying to turn what might be a bad news story into a good news story."