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More than a year ago, when the world was a brighter and less orange place, The Globe and Mail ran a simple, modest series. It was called “Prosperity’s Path.” Over five essays, the scholar Dan Breznitz laid bare all that was wrong with Canada’s economy and explained how to fix it. (Did you know that Canada is among the world’s top 10 exporters of stolen cars?)
We now revive that series, because the world has changed, and yet the original sins of the Canadian economy have not. With a hostile United States, this country’s problems have only gotten more visible, more numerous and worse. A rotating cast, from The Globe and beyond, will offer solutions on how this country can get back onto prosperity’s path.
Today, to kick things off, we talk about the word of the season, “sacrifice”: why we need it, why we haven’t done it and how we can achieve it.
Prime Minister Mark Carney beat this drum until it broke: As U.S. President Donald Trump threatens Canada’s economy and sovereignty, this country must spend more defending both and less on social programs and such.
Mr. Carney is not wrong. America’s second president, John Adams, once told his wife: “I must study politics and war, that our sons may have liberty to study mathematics and philosophy … in order to give their children a right to study painting, poetry, music.”
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We are not, as Mr. Adams was, amid war. But arguably we are not at peace either. So, yes, we must have fewer nice things. If we sacrifice now to invest in the future, maybe our children can have those nice things.
But where exactly is the sacrifice? The budget, to be voted on by MPs on Monday, had much-hyped cuts to the public service. But there were no major tax hikes or cuts to social programs. The budget had nearly $90-billion in net new spending. To pay for that, we borrow on the bond market. Canadians down the line pay that back.
Canada’s books are relatively good, and the government says we’ll borrow less next year. But we say that year after year, announce more borrowing and shift the goalposts. The trend is worrying. In Britain and France, debt devastates state capacity and breeds instability because those countries once thought their books were good, too.
Instead of asking what we can do for future generations, we asked what future generations can do for us. That is not sacrifice. A prebudget Globe editorial cartoon was surprisingly prescient: It showed kids handing Mr. Carney their Halloween candy.
If we want to, in Mr. Carney’s words, “invest more” and “reinvest in the Canadian Armed Forces,” we should pay for today’s spending today. The cuts to the public service are positive. Ideally, we should cut more, such as from Old Age Security, which benefits rich as well as poor retirees. But OAS seems a sacred cow no party dares touch. Indeed, a lot of federal spending covers various benefits, health care and social services – politically impossible to cut.
That leaves raising taxes, and we can choose the least painful path: Raise the goods and services tax. Let’s bring GST back to the 7 per cent it was when then prime minister Brian Mulroney introduced it in 1991.
It’s not a radical idea. Many think tanks have called for it. A broad consensus of economists, policy experts, former government officials and chief executives is supportive. Many economists agree that taxing consumption does less to hurt productivity than taxing income.
According to Ottawa, one percentage point of GST is worth more than $10-billion a year in federal tax revenue. Extrapolating from that, a two-percentage-point hike for five years is north of $100-billion. That’s more than the entire net new spending of the budget.
If we say Canada can borrow more because it has not borrowed as much as European countries, we should also compare consumption-tax levels. Canada’s GST is relatively low, even if provincial sales taxes are factored in. In Nordic countries it’s as high as 25 per cent.
There is a success story right there in the old country. Ireland gives tax incentives for business investment, but that is balanced by consumption taxes as high as 23 per cent. From 1995 all the way up to the 2008 financial crisis, Ireland’s economy grew 6 to 10 per cent per year, on average.
Yes, we are in a period of rank inflation and economic turmoil. Prebudget surveys showed that sacrifice is not popular. Moreover, a consumption tax is inherently regressive.
But let’s not forget that in Canada consumption taxes are not charged on necessities such as groceries, and lower-income folks get some back via the GST credit payment. If we worry about the regressive impact of a higher GST, we can always up the credit.
And the government can do a better job of selling the GST hike. What makes a magician successful is showmanship, after all, and not necessarily the specific trick performed.
This goes back to that word: sacrifice. That’s what carbon taxes are. We pay a cost today so that our children won’t have to tomorrow. The problem is that, especially for the consumer-facing version, Ottawa couldn’t make people see it. The main benefit was abstract but the cost tangible. The secondary benefit, the rebate, was sneaked electronically into bank accounts under the nondescript description “CANADA FED.”
Contrast that with Ontario’s $200 Ford-bucks affordability boost. Cheques came in the mail with a letter explicitly saying that benevolent leaders on Mt. Olympus have bestowed this great boon. And consider Signmyrocket.com, a Ukrainian crowdfunding campaign that writes donor messages on rockets and sends photographic proof before firing them at Russia.
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Ottawa should pre-give some of the rebate from the higher GST immediately in the same cheque-and-letter format. And Ottawa must identify a firm spending area for the additional GST and be loud about it.
Michael Wernick, former clerk of the privy council, has suggested a 2-per-cent “defence and security” consumption tax. It’s really just a GST hike, but his proposal labels where the money goes and separates it. Does it have to be defence? No. Money is fungible. Could be infrastructure. Could be a sovereignty tax. What is important is that this 2 per cent doesn’t diffuse into general revenue, as the GST does.
Whatever that spending area, this tax should be clearly labelled such on receipts. And the cheque and letter sent should not only elaborate in detail what that additional GST buys but also include a personal thank you from a real person. If it’s a defence tax, the thank you could be from a soldier. We can go even further and have high-schoolers pitch in, thanking taxpayers for not saddling them with debt in the future.
It’s been done. For funded writing residencies and academic prizes, recipients are encouraged to write such thank yous to donors. It can be effective.
The cornerstone of a popular mandate is transparency. People are more willing to spend if they know where their money is going, believe that it is the right expenditure and see the impact of it. Ottawa needs to make Canadians see this, because it needs to hike the GST. Ultimately, a sacrifice is not a sacrifice if nothing is given up.