COVER

TAX CUTS, ANYONE?

MARY JANIGAN February 17 1997
COVER

TAX CUTS, ANYONE?

MARY JANIGAN February 17 1997

TAX CUTS, ANYONE?

COVER

MARY JANIGAN

Sarkis Assadourian went to a lot of trouble to clinch his job as a Liberal MP— and he wants to keep it. As the federal candidate in a northern Toronto riding in 1988, he lost by 604 votes. In 1993, he ran again and won, only to learn that his riding was about to evaporate because of boundary changes in the coming election. Today, he is the Liberal candidate in Brampton Centre, a sprawling community northwest of Toronto where he has few roots. So, does he feel a need to promise tax cuts to win the hearts of those unfamiliar, tax-weary voters? “No, really no,” says Assadourian. “They understand we just can’t abandon our deficit fighting. Any extra cash should go to low-income families. Middle-income earners will be patient because they want to see a zero deficit.”

Such assessments are sweet music to Finance Minister Paul Martin.

After three years of fiscal tough love,

Ottawa will likely undercut this year’s deficit target of $24.3 billion by $5 billion. Just about everyone has an opinion on what Martin should do with the windfall. Politically, the pressure to lower some taxes, any taxes, is steady—but not overwhelming. Party strategists are keeping a wary eye on the popularity of the Reform party and the Conservatives—both promise substantial tax breaks—and on the financial health of the five provinces that have cut taxes since 1995. The economic pressure is far less compelling, because experts are divided about the benefits of cuts and the sorts of taxes that should be cut. “The Canadian public was gradually educated to the fiscal crisis,” says David Perry of the Canadian Tax Foundation. “Now, the public is not about to say, ‘We want tax cuts above all else.’ ”

The finance minister is adamant about his own timetable for tax relief: no major cuts until the deficit is licked. Martin told Maclean’s that if he cuts taxes before the deficit disappears, financial markets will conclude that his deficit-fighting determination is wavering. That would put pressure on the Bank of Canada to raise interest rates to lure back jittery investors.

His approach will change when the deficit is gone. At that point, the government will have to decide what to do about the accumulated debt, which now stands at $600 billion. The answer, Martin says, is to ensure that the economy grows faster than the debt. “You can cut your way to deficit reduction,” Martin said. “But you cannot cut your way to a decline in the debt-to-GDP [gross domestic product] ratio. You have got to build your economy up.”

But the Liberals know they cannot afford to ignore the arguments in favor of income tax cuts—if only because their opponents’ promises of tax relief could catch fire with hard-pressed voters. Five provinces have already cut taxes. In 1995, Saskatchewan sliced its debt-reduction surtax by $150 per taxpayer. By 1999, Ontario will have reduced its take to 40.5 per cent of basic federal tax from 58 per

cent. British Columbia dropped its rate to 51.5 per cent on July 1, 1996, from 52.5. It will decline again to 50.5 per cent on July 1. That same day, Nova Scotia’s rate will drop to 57.5 per cent from 59.5 per cent. And two months ago, New Brunswick announced a reduction over the next two years to 57.5 per cent of federal tax from 64. The five remaining provinces are edging towards relief at different paces. Quebec is unlikely to cut taxes until it balances its books, perhaps by the turn of the century. Alberta will probably offer tax breaks in its 1997-1998 budget. Manitoba, Newfoundland and Prince Edward Island may also offer relief this year.

The economic debate about tax relief is more agonizing. The push for acrossthe-board cuts took off last fall when Bay Street economist Jeffrey Rubin, a vice-president of CIBC Wood Gundy Securities Inc., called for a $4-billion tax cut to pump life into consumer spending. The Certified General Accountants’ Association of Canada has also advocated a $4-billion cut, arguing that Martin should not simply rely on lower interest rates to put money in consumers’ pockets. ‘To put all our ‘policy eggs’ in the interest rate basket may not be the best long-run strategy,” it noted.

Many other analysts believe it is more important to preserve low interest rates than to pass on a modest income tax break. “If we did anything on the fiscal side that would cause those rates to jump, we would destroy more jobs than we create,” warns Royal Bank of Canada chief economist John McCallum. University of Toronto economist Peter Dungan says he favors a reduction in Employment Insurance premiums. “But if they give the impression that they are giving up on the deficit target, they could get hammered by the financial markets,” he says. “They are on a fine line.”

Liberals know they cannot ignore the pressure for relief