It's time to consider tax hikes

You have a spending problem.

You're going to hear that a lot over the next few weeks as federal and provincial budgets are tabled in legislatures from coast to coast. Taken together, they will make for an ugly fiscal picture.

Ontario's deficit for this year is expected to top $16 billion, which is more than the total of the deficits in all other provinces combined. However, Ontario is absolutely not alone in its misery.

New Brunswick is forecasting a $471-million deficit, British Columbia, which has already tabled its 2012-13 budget, reported a $2.5-billion deficit for the previous fiscal year, $1.6 billion more than estimates. Even oil-rich Alberta is forecasting a $1.3-billion deficit this year. Only Saskatchewan ($56-million surplus) and Newfoundland and Labrador ($755-million surplus) are in the black, and only because of record oil and gas revenues.

In Manitoba, the most recent fiscal update has Manitoba forecasting a record deficit of $1.1 billion. That includes $490 million in flood-fighting costs. Taking those out of the equation, Manitoba's deficit is $630 million, up $190 million in this fiscal year.

Is this evidence that Manitoba, or any of the other provinces, has a spending problem? Perhaps, but not necessarily.

Government spending is going up, of that there should be no doubt. Even if government did not hire a single additional person, or do anything more than it had the year before, spending would still go up thanks to inflation. So, if that's an accepted reality, and revenues are flat, what is a government to do?

If you're the federal government, you focus all the attention on spending cuts. Federal Finance Minister Jim Flaherty has nothing but cold comfort for provinces like Ontario and Quebec that are swimming in red ink. "(Ontario) has major spending problems that built up over eight years," Flaherty said Monday, ignoring other macro-economic factors, like, say, the global recession.

Has Flaherty practised what he preached? Well, Flaherty has never admitted to having a spending problem, despite running up hefty deficits himself. However, he has tightened his belt, if only a bit. According to the most recent federal fiscal monitor, program spending decreased by $3 billion this year. Ottawa is now projecting a deficit of $24 billion, $7 billion less than budgeted. However, revenues went up by $7 billion, thanks to overheated economies in Western Canada. Although there has been restraint, most of the progress Ottawa has made in reducing its deficit has been due to revenue growth, not spending restraint.

Many provinces, including Manitoba, are resisting calls for deep spending cuts. Their theory, well tested in the 1990s when governments slashed spending on core services to slay the deficit dragon, is there are greater long-term costs to precipitous spending cuts. And cutting spending while the economy continues to sputter could drive the country back into recession. This is a theory supported by most of the chartered bank economists, who have been warning Flaherty and his provincial counterparts to show restraint when it comes to restraint.

However, if you don't cut spending, and revenues are flat, could you actually consider -- dare we say it -- increasing taxes? It has become so completely unfashionable to raise taxes, even though most governments at all levels found ways to boost surcharges, levies and user fees to offset more obvious cuts to income and sales taxes. On the whole, however, it has become politically difficult to raise those taxes we've cut, although it may become inevitable given the lingering economic slowdown. B.C. Finance Minister Kevin Falcon is considering a one-point bump to the corporate income tax rate if the economy does not improve this year. This on top of cancelling a scheduled cut to the small business corporate tax rate.

If there are tax cuts coming in Manitoba's budget, to be tabled in April, no one is letting on. To date, Manitoba has not rolled back or cancelled any of the tax cuts it introduced during the 10 years in which it balanced the budget. Whether that will continue is anyone's guess but the Manitoba NDP are keenly interested in avoiding the "tax-and-spend" label the Tories try to affix to them at every budget debate.

Deficits are complex beasts, driven by spending, revenues and -- as was the case over this past year -- acts of nature that no one can predict. Deficits are not, however, forensic evidence of a spending problem. And they are not defeated solely by focusing on spending and ignoring revenues. Not if you want to protect services.

We just got through an extended era when taxes were going down and revenues seemed to have no ceiling. That has changed. Now, in some antithesis to the laws of fiscal gravity, what came down may ultimately have to go back up once again.

dan.lett@freepress.mb.ca

Republished from the Winnipeg Free Press print edition March 16, 2012 A4