Canada's Fiscal Deficit

Canada stands alone amongst G7 nations as the only nation that did not bail out its banks during the recent financial crisis.  It was not because our banks did not get hurt by the Sub-Prime meltdown.  Several billion dollars in charges were taken by our banks and indirect effects hurt them as well.  However they were strong enough to withstand the storm without going cap in hand to the taxpayers.  Canadians should be proud.

Canada also went into the recent downturn with a history of budget surpluses.  Many proponents of Keynesian economics favour deficit spending during recessions coupled with surpluses during periods of growth.  Canada is the only member of the G7 to have practiced this.  The other nations all had deficits during the growth years.

Now that we are past the worst of the recession (according to some), it is time to ask how we dig ourselves out of this deficit so that we can start paying down our national debt before the next crisis hits.

Obviously stimulus spending will end.  However that is not enough.  The current government has cut the GST twice since taking office to 5%.  This was always a triumph of politics over sound policy.

There are only two ways to get the deficit back into surplus.  1) Cut spending massively 2) Raise taxes.

Spending will simply not be cut enough to make this happen.  Taxes must go up.  The question then is what taxes should go up.

On this point there is simply no debate as a matter of policy.   The GST is a consumption tax that is applied fairly and evenly.  It does not create disincentives to work and is most efficient in administration....especially since so many provinces have harmonized.

If the Tories want to show that they are reliable stewards of the nation's finances, they will bite the political bullet and raise the GST back to 7%.  It's the right thing to do.  Somehow i am doubtful that this will happen.