Higgs, Holt and the Looking Glass

Fredericton’s worst kept secret – that the province would not be able to balance its books by the next election – came out today.  If you read this blog from the first Tory budget you will see that I said it would be virtually impossible to balance the books without some dramatic new source of tax revenue or some large scale unforeseen private sector economic activity.  We were (and are) in a perfect storm when big private sector investment projects were winding down and the government was curtailing spending.  That has led to very weak economic growth and reduced expected tax revenues – presto – no balanced budget likely until 2015 – maybe beyond.

It is unlikely the Tories will take a political hit for this as deficits and budgets have always been an abstract concept to taxpayers up until the point it hits them personally – then it becomes more of an issue which is why governments are loathe to take a cleaver to spending or raise taxes in any substantial way.

The Liberal response so far has been to increase the rhetoric against ‘big business’ – although I guess for French speaking New Brunswick it’s further refined as ‘multinational’ business.  It would be nice if the Libs would put forward some ideas on a growth agenda that didn’t involve stifling investment.

We are living in Alice’s Wonderland.  The Business Council – made up of those evil big businesses – called for tax increases – on big businesses as well as other areas – and have recieved quite a pummelling in social media and among some pundits.   I thought it was a courageous move – and counterintuitive.  I guess when you are Darth Vadar you can’t win.  Call for lower taxes – get pilloried for raw self-interest.  Call for tax increases – get pillored for……

The Canadian Tax Federation is apoplectic over the call for an HST increase – even with more aggressive rebates for low income families.   I reiterate that most economists – certainly not all – prefer consumption taxes as they are clean, neat and relatively predictable.  There is less room for error and gaming the system through clever tricks.

Speaking of clever tricks, when Bernard Lord dropped the small business tax rate to 5% (or was it 3%?) – he was heralded by CFIB, Chambers and just about everyone else as a hero.  I simply asked for data to show the value to the economy of that cut.   Within five years of the cut, the number of small businesses in the province had actually declined by two percent – one of the worst rates of business formation (or lack thereof) across North America.  We were told cutting small business tax rates would stimulate small business activity and we received no proof – no after the fact analysis – nothing.

We do know that something like 1,000 unincorporated small businesses converted to incorporated small businesses within a year or so of the rate cut.  It looks like some folks wanted to shift income from labour to profit to get a lower rate.

I say all this for two reasons:

1) Tax policy should have a point.  Here I don’t actually care what that point is but there needs to be a point.  If you say you are cutting small business tax rates to stimulate new investment in small business than please back up that with some proof (either pre or post).  If you say you are cutting small business taxes because you think it is the moral thing to do (an ugly word in tax policy) than say so but don’t gloss it up as a measure to stimulate economic activity.

2) 95% of small business activity is reactive – it reacts to what is going on in the local economy.  If the market for electricians is weak, cutting their taxes will not increase the need for electricians – or restaurants – or coffee shops or any other of the 40,000 small businesses in this province.  Don’t promote tax policy as a vehicle that will do something when it will not.  If you want to use tax policy to stimulate investment than do so – directly.  Tie the tax break to the investment.

 

 

 

 

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12 Responses to Higgs, Holt and the Looking Glass

  1. Chris Baker says:

    With reference to your previous blog, it is time for some “heavy thinking” on the issue of government spending and, inevitably, government’s role in our society/economy.

    I believe that government can be a force for positive change in New Brunswick (and I emphasize the conditional nature of this statement). That said, this does not happen by accident. Nor can this be achieved by a knee-jerk defence of the status quo, which includes both maintaining ongoing deficits as well as calling for dramatic increases in revenue (raising HST for example).

    We need to align our policy goals (which is nothing more that ensuring departments work together and not at cross-purposes) and set out our objectives. Then we need to work towards them – considtently and patiently. It’s not sexy. It doesn’t generate headlines or provide topics for discussion for the chattering classes.

    New Brunswick is not well-served by panic or pessimism. We need direction and confidence. We need to listen carefully to the evidence that is before us, good and bad. Most of all, we need to have courage, both to create the plan together and to stick to it afterwards.

    NB has done it before. We can do it again.

  2. “We need direction and confidence.”

    I wonder if there is an ACOA grant for that. Seriously, in the past we had some leaders with vision who hauled the province along (often kicking and screaming). Now there may be some who prefer the kumbaya approach, but I think we need some tough-minded folks with the right vision at the controls. All I see now (in all the political parties) are poll-focussed floaters. The civil service seems to be deeply demoralized and many of the top public service positions have been politicized. In other words – directionless and lacking in confidence.

  3. Don Dennison says:

    Direction and confidence. Another NB leader I very much respect used a slightly different formulation – courage and imagination – when asked whether the self-sufficiency concept could succeed. He then expressed the view he doubted we had enough of either to make it. Was he right?

  4. mikel says:

    Government is virtually NEVER a ‘force for positive change’. Its not in their nature. They are politicians and politicians react to the public-that’s their job. That’s of course until they are elected. I find it hilarious that somebody would day they are ‘poll watchers’. Good grief, Alward was elected on promises offering everything to everybody, and within two months started the deficit chant. There have been almost NO policy changes that I’ve seen that are based on polls, if anybody wants to post some then by all means do so.

    The only strategy I can see is the Reaganite one-keep taxes low so that service cuts and privatization can be justified. And almost just as importantly, get people used to living on less so they don’t ask for more. Mr. Campbell is right, it IS wonderland when you have a Finance minister running around the province talking about generating revenue, all while cutting property taxes and refusing to move income tax rates to what they were just four years ago. That’s not Wonderland, that’s institutional insanity-unless, like I said, you are following Reagan’s playbook.

  5. Chris Baker says:

    Well, you could argue (as some have but I won’t) that Graham’s move to cut taxes as increase infrastructure spending was “Reaganesque.” But Reagan and his successor Bush(es) are better known for skyrocketing deficits rather than economic progress. In fact, so-called Conservatives – in Canada and the US – are known for skyrocketing deficits, miguided tax cuts, and stagnant economies. These “borrow and spend” Conservatives are the very anti-thesis of fiscal prudence. In contrast, Clinton and Chretien managed to balance budgets, stimulate job growth and, once budgets were in a more stable position, provided tax cuts to the middle-class.

    Yes, government CAN be a force for good.

  6. “Alward was elected on promises offering everything to everybody, and within two months started the deficit chant. ”

    And where do you think those promises came from? Focus groups that were polled by party communications staff. Where is the growth in government depts the last few years? Communications – the poll-watchers.

    The ‘deficit chant’ started two years after Graham was elected. Have you forgotten the “Graham debt clock’ on the front page of the Con Party web site? Deficit reduction was part of the party platform from the time the writ was dropped; but the promise was to reduce the deficit without adversely affecting any programs. That was because the pollsters told them that was the way to go; it was a lie, but one people wanted to believe.

    Polling has become a key operation within political parties and is the basis for many policy positions. That is why the HST won’t go up until after the next election. Nothing to do with a referendum – it is just too unpopular. Same thing for income tax and corporate tax reversals – unpopular with many of those who vote (and donate) to the PCs. It is all about polls, not leadership.

  7. Paul says:

    Chris, your Liberal bias is showing. Tax cuts to grow economy was a Liberal policy.It cut both Corporate and personal taxes in 2008 saying. “Combined with the government’s two-year, $1.2-billion capital [project spending] plan, this will help provide the economic stimulus to recover from the current economic slowdown and accelerate our path to a more self-sufficient New Brunswick,” Boudreau said.

    Using your argument, the Graham tax cuts and spending are responsible “for skyrocketing deficits, miguided tax cuts, and stagnant economies. ”

    Have you changed your view since 2008?

  8. mikel says:

    I said positive CHANGE, not ‘good’. Of course government is a force for good-health care, education, roads, and on and on. NONE of those things were government INITIATIVES, in most cases, like health care, they were instituted out of fear, and in cases of human rights, they almost ALWAYS institute that change because they are forced to by the courts or the public.

    I’m not DEFENDING what they are doing, only stating the potential reasons behind it. In the Reagan playbook the deficit was irrelevant, in fact Reagan only very rarely mentioned it. It was about ‘freeing up’ the free market.

    However, it can be argued that it simply ‘takes time’ for the market to match the government’s fiscal policies. Chretien’s ‘balanced budget’ came, in large part, from Mulroney’s GST, and one could argue, free trade agreement. So the idea that Chretien was a great fiscal manager is actually kind of dumb. Government revenues typically match what the market is doing. It’s hardly Stephen Harper’s fault that the world’s economy crashed, so while I”m no fan, his ‘management’ isn’t any different Chretien’s was-who also basically robbed EI, slashed payments to the provinces, and robbed pension plans.

    We can only guess what is going on with the government, but certainly given how Alward balked on medical purchases for Saint John, then privatized a similar service in Moncton, lowered property taxes for corporations, eliminated taxes for apartment and second home owners, then goes on a tirade about ‘we need more revenue people’, frankly, I really can’t see what ELSE it could be.

  9. mikel says:

    Keep in mind that the tax cuts came just as the worldwide economy was tanking, but its true that Graham used pretty fudged numbers for those years avoiding deficits, as did Lord before him.

    As for the tories, I wasn’t talking about opposition parties, but government. Opposition parties do just that-they oppose just about any policy of the government, and even more stridently if they think it has traction. The liberals were chanting ‘public insurance’ all during the last election they won, but that went out the window once in power. The tories may have had a ‘debt clock’ but only as a tool, they certainly weren’t too concerned about it when Lord was in power, and like I said, during the election there was NO mention of it.

    And again, just use your head. Graham brought in deeply unpopular tax cuts for the wealthiest New Brunswickers, so unpopular that credit rating agencies lowered the credit rating. Can you even imagine a poll that has New Brunswickers saying “no, its great that those earning over 100 grand are saving that extra money”. So how is that ‘governing by polls’?

    Even though David says otherwise, I’ve seen very little chastising the companies that are saying to increase corporate income tax-although many may rightly question their philanthropy. Polls for YEARS have been saying NBers want higher corporate tax rates, even the governments own website poll ranked this far above ‘service cuts’. Yet even though practically EVERYBODY is saying to do this, now Higgs is talking about tolls and HST. He isn’t even MENTIONING income taxes, not even for a referendum. Again, thats the OPPOSITE of polling.

    And again, you may question why the province has a provincial property tax on apartments, but to ‘phase out’ that revenue at a time when apartment owners certainly aren’t bankrupt, and the province is supposedly in dire straits, seems to me to be insane.

  10. “So how is that ‘governing by polls’? ”

    No one said ‘governing by polls’, except you. You are confusing what was said with what you think was said. Please re-read and try again.

  11. Will says:

    Paying higher taxes is really hard to swallow when a lot of people fighting against natural gas jobs and revenue, wind energy and other businesses coming to town.

    If we were encouraging oil and gas development and being quick to create regulations and not pandering to local companies then many might be a little more open to it. Dealing with deficits by taxing and making NB even less attractive while turning down all sorts of business doesn’t seem to make sense to me.

    Let’s poll people – do you want to work a few months in the summer and collect EI all winter while getting paid under the table? I’m sure most would say yes. Does that mean we should do that? They even go to great lengths to guarantee lobster prices of all things. It’s called the tyranny of the majority for a reason. Someone needs to stand up to the dependency mindset out here and get business rolling out here.

    I moved here and contribute a lot of money to the government and local businesses/contractors. But I would pay more if I saw other things being done as well.

  12. mikel says:

    Fortunately, the main people ARE open to it. Those are some pretty petty complaints, lobster fishing is hardly the only product with guaranteed prices for consumers in it, what do you think the wheat board did? What about chicken and milk? Heck you can argue that most of oil’s costs are hidden costs. Point Lepreau has to build in the costs of dismantling it once its life is over, yet oil companies out west can destroy the environment with no thought to the environment. I could go on and list other subsidies and hidden costs as well, so why don’t you just ease up on lobster fishermen.

    As for ‘dependancy’ issues, thats just a ridiculous argument and anybody with half a brain knows it. Alberta DEPENDS on oil that is under the ground. Without that it would be nothing, in fact even WITH that it is now running a huge deficit. They are FAR more dependant on oil than the people of NB are on EI.

    That’s a pretty biased view of people, hold onto it if you want, but don’t expect others who actually want to deal with policy issues to buy into it (but don’t worry, you have lots of support out there). I just wonder what evidence you have of all these jobs in rural areas that are ‘under the table’. If they are under the table that means there is no tax on them, which means it would be far more profitable to simply work all year under the table.

    Society is not set up simply to cater to your whims. Nobody ASKED you to move to the province, and nobody is making you stay. Your contribution to the government and economy would be matched more than easily by the tax policies I mentioned. Again, right now the critics have only been talking about getting rid of the Graham tax cuts, which were actually very similar to the Bush tax cuts, which ironically are ending.

    The ‘tyranny of the majority’ remark is surely a joke. When those tax cuts were brought in virtually NOBODY except the ‘5%’ supported those actions. And they are the only ones who benefit from the new tax cuts Alward has announced. It would be NICE if there were a ‘tyranny of the majority’, in fact it would be great. Then, at least perhaps we’d see some movement on something we both agree on and get things like wind power and alternative energy supported. On that point it looks grim because its mostly the next generation that has environmental issues ingrained into them, which means NB will likely be way behind every other province in that regard as well.

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