Scheer Debt plan and Fiscal responsibility

Scheer has released the Tories full platform and has come under a lot of criticism of too much austerity.  The reality is even under Scheer’s spending plan, spending will increase by $35 billion, but it is being called a $53 billion cut as cumulatively over 5 years will be that amount below the PBO baseline.  Below I will discuss why balanced budgets still matter and why its unfortunate too many are okay with more debt.

There is plenty to disagree with the Tories on, but their plan is quite modest.  Nothing like the major cuts the Liberals made in the 90s (to be fair we are not in as dire a situation) or even some provinces including some Liberal ones like Quebec under Philippe Couillard recently or heck even NDP under Romanow in Saskatchewan in the 90s.  In fact had Trudeau not gone on such a big spending binge, we could have a surplus today.  Last year, revenue increased by $22 billion, yet we still have a $14 billion deficit.  Had we limited spending increases to $8 billion we would have a balanced budget.  Most years won’t see revenue increases that big as last year was a strong one on economic growth, but on average revenue grows by $15 billion a year, so keeping spending increases to only $10 billion a year should be sufficient to balance budget in 5 years.  In fact if it were up to me, I would go hard in the first two years (unless there is a recession, then you need to spend), but I realize that might be a tough sell.  I do think though they should stop promising tax credits which would help and also should promise a full tax review, which they alluded to, but little detail on.  The top marginal rate if you combine all levels of government is between 47.5% to 54%, yet the average effective rate for the top 1% is only 31%.   Some pay as high as 45.7%, while others as little as 6%, so I think going after those who pay less than 30% could yield a lot of revenue.  To avoid the backlash you had with small business changes, I would agree to lower the top rate so no person has a combined top rate over 50% and that was how past tax reforms in 1971, 1981, and 1987 worked.  Each reduced the top rate, while each closed many loopholes thus increasing government revenue.  Another option is raise GST back to 7% and that is $16 billion right there.  So the point of this is if one wants a balanced budget it is doable and I believe it should still be a priority despite many economists claiming it doesn’t matter.  With an aging population and global risks; it is best to save now so we have more for later as long term risks could easily cause the deficit to get much worse.  As such there are plenty of ways to balance the budget in under 5 years and if it can be done ahead of schedule and we have a larger than expected surplus, that is a good thing.  In fact building up a reserve ultimately means more available for unexpected events, which almost certainly will happen at some time.

Many economists argue our debt to GDP ratio is low, so we shouldn’t worry.  The problem here is realpolitik as once one jumps on the deficit bandwagon, it is very difficult to get off until you hit a crisis point, even if that is many years away.  Trudeau promised a deficit of no more than $10 billion, but blew through that and is now promising even bigger deficits never mind many promises like universal pharmacare not budgeted for.  This means the deficit if Liberals get re-elected or we have some left wing coalition will likely be much worse.  Also our debt to GDP ratio if you combine all levels of government is not so healthy.  If you look at this we do worse than most OECD countries and of G7, we are well above Germany, similar to UK, although below France, Italy, US, and Japan (all of whom are some of the worst offenders on earth) and with health care falling under primarily provincial jurisdiction and costs likely to rise with aging baby boomers, federal government needs to grant provinces more fiscal room to raise revenue to cover this or increase transfer payments and a higher debt burden will make this tough to do.  In some ways it is sad that all the effort by the Chretien/Martin Liberals to restore fiscal sanity may go to waste and also unfortunate that many European countries now have surpluses so can cut taxes and increase spending on what matters thanks to stronger discipline, while it seems a lot of Canadians don’t care.  I would rather we have a little mild short term pain now than wait until it gets worse and will be much harder to fix.  Likewise the less debt you have, less money you have to spend on interest servicing it and that means more money for both tax cuts and spending on important programs.  While the Tory plan is far from perfect, it is a lot more responsible than the Liberal, NDP, or Green ones.

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