Conservatives offer up a high-tax plan

With an election around the corner, Tuesday's federal budget was all political spin. The Conservative government presented the next phase of its Economic Action Plan: A Low-Tax Plan for Jobs and Growth.

The reality, however, is that the plan increases the federal tax take, increases government spending, introduces a host of activist economic initiatives, and fails to provide a truly credible plan to balance the budget. It will, therefore, do little to improve economic growth and create jobs.

Indeed, a more fitting title for the budget would have been A High-Tax Plan for More Government Spending -not exactly the message the Conservatives want to leave Canadians with as Parliament dissolves.

In delivering the budget, Finance Minister Jim Flaherty made a series of promises: We will keep taxes low. We will undertake additional targeted investments to support jobs and growth. We will control government spending, and stay on track to eliminate the deficit.

For starters, taxes are hardly low. In 2010, Tax Freedom Day, the day that the average Canadian family has earned enough income to pay all the taxes levied on it by Canadian governments, was June 5. In other words, we work over five months of the year just to pay our taxes.

Unfortunately, the 2011 budget will increase the total federal tax take from 12.9% of GDP in 2010-11 to 13.4% in 2015/16. While this may seem insignificant at first glance, a half a percentage point increase in federal taxes as a percent of GDP works out to $67.1-billion.

The most significant increase in the tax take comes through personal income tax revenues, which will increase by $38.2-billion (34%) over the next five years, from $113.3-billion this year (2010-11) to $151.5-billion in 2015-16. Add in higher revenues from corporate income taxes and total income tax revenues will increase by $50.8-billion. With a cumulative deficit of $54.6-billion over the next five years, higher income tax revenues will be almost entirely responsible for bringing the budget back to balance.

Rather than increase the tax take, a true low-tax plan would have aggressively cut spending to balance the budget within two years. Once back in balance, the government could implement a multi-year plan to reduce personal income taxes.

Canada's personal income taxes are too high relative to other countries. Indeed, the Conservatives' own policy document, Advantage Canada, confirms that Canada needs lower personal income tax rates to encourage more Canadians to realize their full potential.

This brings us to Mr. Flaherty's next budget promise, to undertake additional targeted investments. Rather than focusing on creating the right overall economic environment to encourage economic activity through lower spending, balanced budgets and broad-based tax relief, the Conservatives are again proposing to provide goodies to special-interest groups, with newly added boutique tax credits such as the temporary Hiring Credit for Small Business ($165-million), Family Caregiver Tax Credit ($160million per year), Children's Arts Tax Credit ($100-million per year), and Volunteer Firefighters Tax Credit ($15-million per year).

Additionally, the budget offered $90-mil-lion for an extension of the temporary 15% Mineral Exploration Tax Credit, $620-million for the manufacturing and processing sector, $100-million over two years for the clean energy industry, $870-million over two years for climate change initiatives, and $80million in new funding for the Industrial Research Assistance Program, among others.

The most worrying part of the Conservative plan was the government's unwillingness to implement a more serious plan to balance the budget. The government is pinning its hopes for a balanced budget in five years on a combination of higher revenues and successfully slowing the growth in spending. Specifically, the Conservatives expect revenues to grow at a robust average rate of 5.6% over the next five years while planning to hold program spending increases to an average rate of 1.6%.

Mr. Flaherty adamantly stated, We will control government spending, and stay on track to eliminate the deficit. However, history shows that his government has difficulty restraining spending. Even before the financial crisis and its massive stimulus spending, the Conservatives increased program spending by an average rate of 5.9%.

The initial stimulus spending plan put forth in the 2009 budget proposed a temporary two-year increase in spending compared to the 2008 spending plan. That is, spending was planned to return to the level proposed in the 2008 pre-recession spending plan by 2011-12. Apparently, that is not going to happen. An even higher level of spending was introduced in the recent 2010 economic update and any plans for a return to pre-recession spending levels disappeared in the 2011 budget.

As a result, program spending for 2011-12 will be $10.6-billion (4.5%) higher than the Conservatives originally proposed in the 2009 stimulus budget.

Given the trend of successive budgets increasing in the expectation for spending, and the Conservatives pre-recession spending record, it's hard to see how the government will hold spending increases to an average rate of 1.6% over the next five years.

While Tuesday's federal budget might provide the Conservatives with good rhetoric heading into a federal election, the truth behind the spin is a different matter.