Canada: Economic Issues for Election 2008

Deficits: There will be considerable attention paid to the risk of a fiscal deficit this year and/or next. This government has put its reputation for economic management and credibility on the line in pledging that it will avoid a deficit. It must be noted, however, that from the economic perspective there is not the same discontinuity between a small surplus and a small deficit that there is from the political credibility perspective.

In Global Insight's view, there is very little probability of a deficit this fiscal year. Owing to high energy and other commodity prices, revenues are coming in at least as strong as forecasted, and nominal GDP—the general tax base—is now forecasted to be well above the Budget 2008 forecast, overwhelming the slight under-run of real GDP. Interest rates are running slightly below the Budget 2008 forecast, providing some relief on debt charges. Moreover, the government now has over $4 billion from the Spectrum Auction, not counted in Budget 2008.

Things are much tighter next year. Budget 2008 forecasts a smaller surplus. For 2009, the forecasted overrun of nominal GDP is matched by the under-run in real GDP. If the government books 10% of the proceeds of the Spectrum Auction in 2008/09 as expected, its options would seem to be closed to do otherwise for 2009/10.

The key conclusion is that no party should promise to cut taxes and/or increase spending beyond the Budget 2008 plan unless it details how the extra fiscal action will be financed by higher taxes and/or lower spending than the Budget 2008 plan.

Environment/Carbon Taxes: There will be a substantive debate over environmental policy, since this is the Liberals' major economic policy plank. They are strongly promoting a revenue-neutral carbon tax, while the Conservatives favor a cap and trade system, but are keeping their environmental policy less detailed, more flexible, and lower profile.

Most economists favor the revenue-neutral carbon tax approach, but there remain many significant questions regarding the Liberals' "Green Shift" version of this approach. How high does the carbon tax have to be to curtail a given amount of carbon emissions? What is the optimum distribution of the revenue collected from the tax, between funding incentives for new environmental technology, compensating those who bear the burden of the carbon tax, and funding other social/political priorities? How effective would Canada's carbon tax be on global climate change if the other heavy polluters, such as the United States, China, and India, did not impose similar costs on carbon emissions? What is the impact on the competitiveness of the Canadian economy if imposed carbon taxes exceed those in the United States?

Economic Growth and Productivity: Most Canadians want a stronger economy, and higher paying and more secure jobs over the medium term. This will probably not be obvious from following the election campaign. The only route to sustained increases in the standard of living is increased productivity. The route to increased productivity is well known and pretty much agreed upon by both major parties, even though it is complex and multi-faceted. It involves lower marginal tax rates on both business and workers; increased funding for infrastructure, education, and training; and more effective regulation. The record of both Liberals and Conservatives is to present plans for how they plan to increase productivity. But by the time the high-profile politically sensitive needs are served, little is left for the productivity agenda.

Tax Policy:What is the optimum approach to personal and business tax policy? Is it to focus on targeted tax relief through tax credits or to put a higher priority on broad-based tax cuts?Generally, economists favor the incentive effects of broad-based tax cuts, but politicians often find tax credits focused on politically sensitive groups to be more tempting. Both major parties argue that personal income taxes are too high. Recent tax reductions by both parties have focused on the lower end of the personal income tax scale. What priority should be given to tax cuts focused on middle- and higher-income earners? This is always an important area for election debate, but substantive debate on the costs and benefits of tax changes is often challenging for both the politicians as well as the voters.

Hot Potatoes: There are several real "stinkers" in current economic policy—specifically dairy policy and EI policy. Both move the country backward in terms of economic potential, and lower the standards of living for Canadians overall. The dairy policy even transfers income from poorer to richer. There is an opportunity here for someone to show economic policy leadership, albeit at the expense of alienating some narrow, politically powerful groups. Do not expect any takers on these hot potatoes in this election.