Don Drummond has a novel idea for Ottawa, as it prepares its spring budget and plans for the years ahead.
Try dropping the sugar coating. Get blunt about the future threats facing government finances. Confront the hard choices required to fix them.
“Maybe telling it like it is and, more importantly, proposing sound solutions, may be appealing to voters,” the Queen’s University economist suggested.
The respected veterans of Canada’s fiscal policy wars chatted by e-mail last week, shortly after the C.D. Howe Institute published a “shadow budget” co-written by Mr. Drummond, along with the Toronto-based think tank’s chief executive officer, Bill Robson, and director of research, Alexandre Laurin. The document recommends, among other things, that the government raise the federal goods and services tax to 7 per cent from the current 5 per cent – which would return the tax to its level prior to cuts implemented by Stephen Harper’s government in 2006 and 2008.
The authors proposed the move as a key element in a tough but necessary plan to ensure “a sustainable path for federal and national finances,” as we head into a particularly challenging phase for government finances. They argue that the government must take such steps to “redress the damage COVID has done to federal fiscal capacity, and provide more resources Canadians will need to address an aging population, climate change and the energy transition, subsequent pandemics, and challenges we do not yet foresee.”
But C.D. Howe’s shadow budget – an exercise the think tank goes through every year – is really more a concept document of what the authors believe the government should do, than a realistic proposal for what Ottawa will do. We’ve seen nothing to suggest that GST increases are on Finance Minister Chrystia Freeland’s radar. The reality is that tax increases – especially such a broadly based one as a GST hike – are political poison. That’s the kind of telling it like it is and proposing sound solutions that will cost you the next election.
If that seems a tad cynical, it’s also supported by recent history.
Remember that prior to the last election, in late summer of 2021, various public policy experts advocated at least a temporary increase in the GST to help pay down the government’s enormous COVID-19 debt and hasten repairs to the budgetary balance. Yet no party even presented a plan in its campaign platform to address the pandemic debt, let alone broached the idea that a GST increase might be part of the solution. The campaign was devoid of any meaningful discussion on what should have been an inescapable issue. It was an uncomfortable question that led to unhappy answers – so everyone ducked it.
Looking beyond the fiscal hangover from the pandemic, the topic that keeps popping up again and again in prebudget commentaries is the looming threat of an aging population. As more and more of the huge baby boomer generation retires, governments face both a shrinking base of taxpaying income earners, and growing demand for health care and other government services. In short: costs rising, revenues shrinking.
This potential demographic crisis has been baked into the outlook for decades; anyone who glanced at a graph of population figures could predict, with certainty, that it was coming. It has sneaked up on no one.
Yet, as Mr. Drummond noted, successive governments have done shockingly little to prepare for it.
“It is simultaneously the most predictable public policy problem … and the one the least amount has been done to prepare for.”
Even when leaders discuss their concern about the demographic trend, the conversation quickly moves to expanded immigration, to replenish our labour supplies with new, younger workers; and/or to investment in innovation and productivity, to increase economic capacity and produce more output with fewer workers. They routinely avoid suggesting that something like, say, higher taxes might be a reasonable part of the long-term answer.
There are, obviously, compelling arguments against tax increases, and politicians and voters who will always be opposed on philosophical grounds. But in a constructive debate about our future fiscal challenges, surely all options should be open for discussion. Even for balanced-budget fiscal conservatives, revenue solutions must be given weight along with the expenditure side.
And in the case of the GST, the two percentage points of cuts by the Harper government could be considered existing available tax space that’s there for the taking. It’s an established revenue source that a previous government opted to forgo, on the rationale that it was money that the government (which was running budget surpluses at the time) didn’t need, and would be more appropriately kept in the hands of consumers. With fiscal conditions now quite different, it’s entirely reasonable to talk about reversing that decision.
What’s more, we have a very clear understanding of the economy’s ability to absorb a 7-per-cent GST rate, and its likely impact on consumer demand and government revenue. It’s well established, predictable and comes with relatively low costs to implement. If you’re looking for options to increase tax revenue, this one is particularly attractive.
But to be considered and debated, we must first have leaders who are willing to talk about it. Whether voters are ready to hear it, only the ballot box will tell. But for our own good, it’s what we need.