Fiscal conservatism, then and now

It is fitting that Mike Harris and Preston Manning should have released their policy paper on “Building Prosperity,” setting out their vision for improving Canada’s economic performance, within a few days of the Finance minister’s Economic and Fiscal Update. Together the two documents, one bracing and ambitious, the other timid and gimmick-filled, show how far conservatism has fallen.

Mr. Harris and Mr. Manning are of a generation of conservatives who wanted to change things, and said so; and having said so, did. The one campaigned on a radical agenda, and won, and once in power implemented much of it. The other, though never formally installed in government, had as much or more influence from without, harnessing the power of ideas to define the national agenda. There was a time when many would have put Jim Flaherty in the same category. But lately you have to wonder.

Mr. Flaherty’s paper had been billed in advance as an indicator of the government’s general economic direction, a teaser ad for the spring budget. If so, then you can put away the lawn signs, shutter the war rooms: There is nothing in this that should be so provocative to the opposition as to force an election. If Mr. Flaherty’s first budget, as I wrote at the time, could have been written by any Liberal finance minister, the update, and the long-run economic plan that accompanied it, could have been written on the back of a napkin. It’s that sketchy, and that disposable.

It is worth comparing the two plans, Flaherty and Harris-Manning, on some key policy indicators. Start with spending. Harris-Manning propose a long-run objective of constraining total government spending, federal and provincial combined, to one-third of GDP, from its present level of about 40%. To that end, they would hold spending increases to just under 1% per year over the next five years -- a cut, in real terms, but hardly a savage one.

Flaherty, by contrast, commits to no more ambitious measure of restraint than to hold federal program spending increases to, “on average,” less than the rate of growth of the economy. If the economy grew at 7%, spending could rise by 6.9%. On average: some years it might grow more, some less. In the current fiscal year, for example, the Tories plan to raise spending by more than $12-billion, or 7.1%. That’s 7.1%, on top of the extraordinary 47% increase in spending over the previous six years. Put another way, since the 2000 budget, in which Paul Martin promised to hold spending to no more than 3% per year, spending in fact grew at an average of 6.7% per year. And after all that, the Tories propose, not only to add to it, but to accelerate it.

On taxes: Harris-Manning call for sweeping tax cuts, including the abolition of capital gains taxes, reducing the federal corporate income tax to 12% from 21%, eliminating the cap on RRSP contributions, and a single rate of personal income tax. Flaherty? Well, for starters, the government has officially reneged on its promise to cut the GST to 5% within its first mandate.

Or at any rate, it has given itself permission to do so: the next election, if the government does not fall before then, is slated for 2009, but the second percentage point off the GST is now promised for sometime before 2011. I can’t say I’m sorry -- cutting the GST, rather than income taxes, is bad policy -- but we should at least note the latest solemn electoral promise to fall victim to the Tories’ newfound pragmatism.

As for the rest, the only concrete pledge -- aside from hand-waving about “reducing taxes on savings” and “considering opportunities to reduce tax distortions” -- is that the government will dedicate the savings in annual interest payments arising from debt reduction to tax cuts. This is meaningless: you can’t earmark revenues in that way. And it’s trivial: even with last year’s $13.2-billion surplus, the interest saved amounts to $700-million. Now consider that the government is only committed to paying down debt by $3-billion a year.

On the economic union: Harris-Manning propose a reference to the Supreme Court to establish, once and for all, the federal power to enforce a single market within our borders, ie by striking down interprovincial trade barriers. As important, they urge the feds to use it. Flaherty? Nothing but a wan commitment to “engage with” the provinces to that end. It’s nice to see Flaherty call for the remaining provincial holdouts to harmonize their sales taxes with the GST, and for a national securities regulator. But unless the feds take out the big stick, it’s hard to see how it will happen.

A final note: Harris-Manning make no specific recommendations on monetary policy. Flaherty includes an agreement with the Bank of Canada to extend the current 2% annual inflation target for another five years. So points to him. But for pity’s sake: the governor himself was talking about cutting that to 1% only last spring. Would it have been so hard to take him up on it?