The Broadbent Blog


The great shrinkage: Fiscal capacity under Stephen Harper

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Prime Minister Stephen Harper's economic record since taking office in 2006  is at the centre of debate in the current federal election campaign. Arguably his signature achievement is to have radically reduced the fiscal capacity of the federal government, and with it, the broader role of government in advancing the economic and social welfare of Canadians.

As labour economists Jim Stanford and Jordan Brennan have shown, the Harper economic record is the worst of any post War federal government when judged by 16 key macro-economic variables including per capita GDP growth, job creation, unemployment and under-employment, business investment, exports and productivity growth.

To which the government responds that it has had to deal with many factors outside of its control, including a global recession and the recent collapse of commodity prices.           

But the government can clearly be fairly judged by its own discretionary fiscal actions, including decisions as to whether or not to raise or lower spending and taxes, and whether or not to run deficits.

When the Harper government took office, federal tax revenues (2006-07 fiscal year) were 13.5% of GDP, a bit shy of the 14.5% peak in 2000-01. In the most recent fiscal year, 2014-15, they are projected in the most recent federal budget to be just 11.4% of GDP, which is lower than in the mid 1960s before the creation of much of the modern welfare state.

With total GDP now just under $2 trillion, a seemingly small decline in federal tax revenues of 2.1 percentage points of GDP translates into foregone annual revenues of $41.5 billion. To put that in perspective, in 2014-15 federal transfers to the provinces for heath care and social programs combined came to almost as much, $44.7 billion.

If federal capacity were at the same level as in 2006, Canada could afford 8 national child care programs on the scale proposed by Opposition Leader Tom Mulcair. Or we could increase by 7 times the current level of federal funding of transit and municipal infrastructure.

Tax cuts have clearly been a much greater priority for the Harper government than investments in programs or services, or balancing the federal budget. Revenues continued to fall after 2008-09 when the government first ran a deficit, mainly as a result of corporate tax cuts. 

Almost all taxes have been reduced. The general corporate income tax rate has been cut gradually but deeply from 22.1% to 15%, with each one percentage point reduction costing $1.85 billion in lost revenue per year, according to the Parliamentary Budget Officer. The two percentage point cut to the GST introduced in the early days of the government now costs costs $12.8 billion per year in lost revenues.

With respect to the personal income tax, the government has brought in numerous “boutique” tax credits and deductions, a universal child tax credit, and family income splitting which mainly benefits more affluent families with children at a cost of $2.2 billion per year.

While it still costs relatively little, the new system of Tax Free Savings Accounts now allows for contributions of up to $10,000 per  year with no cap on total accumulations. This will eventually all but eliminate taxation of investment income such as capital gains as the assets of the richest Canadians are gradually shifted to tax free vehicles.

Opinions obviously differ as to the wisdom of specific tax cuts and their impact on economic growth and social justice. The government argues that lower taxes and smaller government underpin a strong economy, while the critics point to the unfair distribution of winners and losers from tax cuts, weak business investment despite corporate tax cuts, and the costs of foregone public investments.

One thing is clear. A progressive alternative to the Harper government and ambitious investment plans will be possible only if some part of the massively eroded fiscal capacity of the federal government is restored.

Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University, and senior policy adviser to the Broadbent Institute.

Photo Petr Kratochvil.