Tuesday, 12 April 2011

Why promising tax cuts after balancing the budget is a recipe for fiscal disaster

Mr. Harper, if you can't pay for it now, you can't pay for it later. From the Globe and Mail's Economy Lab.
On the surface, waiting for a surplus to implement a costly new program may seem like a prudent way to control government spending. However, since these programs are not one-time costs, but rather ongoing spending, it is in fact a recipe for fiscal disaster.

Government revenues move in tandem with the business cycle even without any government intervention to stimulate the economy. In a recession, consumers spend less, so less sales tax is collected. Companies make less money, driving corporate tax revenue down. People lose their jobs, driving both income taxes collected down and EI payments up. All of these act to increase the deficit. As the economy improves the effect reverses itself as tax revenue from consumers, workers and companies increases and the deficit shrinks and (hopefully) the government is pushed into a surplus.

The Canadian government is projected to go into a surplus position around 2014-15, as the Canadian economy is expected to be near the peak of the business cycle. Assuming the politicians will keep their promises, these policies will be enacted, reducing that surplus.

At some point, however, there will be another recession, reducing government revenues significantly and these programs will cause the subsequent deficit to be much larger than it otherwise would have been. If we cannot afford these programs in the aftermath of the last recession, why should we believe that we could afford them during the next recession?

Asking ‘can we afford this program right now?’ is the wrong question. Rather we need to ask ‘can we afford this program over the entire business cycle?’ If we can afford the program over the entire business cycle, then there is no reason to wait for a surplus. If we cannot, then the program should not be implemented at all, rather than implemented later.

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