The federal government should consider raising the Goods and Services tax to meet Canada’s defence commitments. On the other hand, it might want to transfer GST tax points to the provinces, to properly fund health care.
No, that’s not a contradiction. Let’s explore why.
The Western democracies are in a full-fledged cold war with a group of autocracies led by China and Russia. In this critical moment, Canada and other NATO members have pledged to spend at least 2 per cent of GDP on defence. Canada is the only member that has not fulfilled that pledge and has no plan to do so. This is a disgrace.
Polls suggest Conservative Leader Pierre Poilievre is likely to be prime minister after the next federal election. Mr. Poilievre has pledged his government would increase defence spending in part by cutting “wasteful foreign aid.” Get real.
The Organization for Economic Co-operation and Development reports that Canada spent 0.37 per cent of its GDP, or about US$8-billion, on overseas development assistance last year. Some of that money was spent on assistance to Ukraine. It’s inconceivable that the Conservatives would eliminate aid to Ukraine while the war is on.
And even if the Tories did shut down the foreign aid pipeline completely, that would not come close to meeting the $20-billion gap between current defence spending and the 2 per cent target. But raising the GST by two percentage points, while also increasing the tax credit for lower-income workers, would net the feds about $20-billion a year, according to the C.D. Howe Institute, a think tank.
Politically, such a move is beyond unlikely. Mr. Poilievre is committed to eliminating the carbon tax. He could hardly raise the GST at the same time. But sooner or later, the federal government must find the money to properly fund defence. Canada can’t be the only outlier in NATO. It just can’t. Our allies won’t tolerate it.
Perhaps the next government can find money for defence by rolling back a raft of Liberal commitments to social programs, such as the new pharmacare and national child care programs. But this would be unpopular, and might not do much more than reduce the annual federal deficit, which could be $51-billion for the last fiscal year.
Cutting the size of the federal public service back to near prepandemic levels would save money, but probably not enough to meet the 2 per cent defence target. Like it or not, the only way to reach that target may be through tax increases.
Alexandre Laurin, director of research at the C.D. Howe Institute, prefers a two-pronged approach. First he would have the government raise the GST by two percentage points. Mr. Laurin would like to see corresponding cuts to personal and corporate income taxes to stimulate economic growth. But the raised money could also be used to close whatever defence spending gap remains after cuts to programs and the public service.
As well, Mr. Laurin would like to see Ottawa transfer GST tax points to the provincial governments, so that they can properly fund health care, education and other social programs without federal interference.
“The federal government should be raising money or reallocating its own spending, not to spend on the provinces’ responsibilities, but to spend its own core responsibilities,” he told me, and “defence is certainly a core responsibility.”
There would be issues with a GST-tax-point transfer, such as incorporating an equalization element for provinces with a weaker tax base, but all that would be negotiable, and the provinces would be eager negotiators.
Any political observer will tell you that there is zero possibility of a Poilievre government raising the GST in the foreseeable future.
But that leaves us with two questions. If Canada remains the only NATO member that refuses to meet its defence commitments, if it reneges on its promise to the United States to help modernize NORAD’s surveillance system, if it acquires the reputation of being the most unfaithful and untrustworthy member of the Western alliance, what might the consequences be?
And to avoid those consequences, where is Ottawa going to find the money it needs to spend on defence?