Paul Martin is in the most enviable position of any finance minister in more than a generation. The national unemployment rate has -- finally -- fallen below 7 per cent, the economy is growing by 4 per cent a year, and the federal surplus is forecast to soar to $30-billion in 2004-05 from almost $7-billion this fiscal year.
Growing surpluses will give the federal government the means to profoundly shape our collective future. From the perspective of both equity and economic efficiency, the priority should be long-term investment in programs, rather than deep, across-the-board tax cuts or rapid debt reduction.
Since assuming office, the Liberals have cut federal program spending to 12 per cent of gross domestic product from 16.6 per cent, and raised taxes to 16.2 per cent of GDP from 14.8 per cent. About $3 has been cut from spending for every $1 of extra taxes. While few programs were unscathed, the burden of those cuts fell most heavily on health care, postsecondary education, social assistance programs and unemployment insurance (UI) benefits.
The rapid elimination of the deficit has had a dramatic effect on public services. The health care system is badly stretched, access to quality education and training for young people is deteriorating and the public infrastructure is rusting.
Monday's budget should signal the willingness of the federal government to enter into long-term commitments to assist the provinces in all of these areas, on the basis of appropriate national standards such as those that still safeguard medicare.
If these actions are not taken, we will witness the growing privatization of health, education and basic municipal services, and reduced access and quality for most Canadians. Paying for good services through taxes rather than out of after-tax income makes sense for the great majority.
The government's obsession with eliminating the deficit has also meant deeper poverty for many families with children, and a growing gap between the haves and have-nots in Canadian society. While average family after-tax incomes have stagnated in the recovery, more because of flat wages than rising taxes, the most affluent have made gains. The incomes of the poorest 20 per cent have continued to fall because of social program cuts.
The budget should restore the UI program as an adequate income cushion for the unemployed, increase federal support for decent provincial social assistance programs, set the stage for a national child care program, and significantly increase federal tax credits for low- and middle-income families with children.
The sheer size of the projected surpluses means that federal spending could be gradually restored as a share of GDP, without increasing the tax share of GDP, and without significantly affecting the fall of public debt. This approach would make us a much fairer and more secure society.
We need to make the tax system fairer and provide some relief to hard-pressed middle- and low-income families, initially by increasing child tax benefits in a major way, and by fully indexing income tax brackets and credits to inflation. But deep cuts now, let alone targeted tax cuts for the rich, would be perverse social policy and dubious economic policy.
The cross-country evidence shows no link between the tax share of GDP and economic growth or productivity. The collective choice to deliver services through the public sector and to provide high levels of social security does not undermine productive private investment, and high levels of public investment in areas from health and education and training to research and development have direct economic payoffs.
The business community has been pushing for special tax breaks for the very affluent, such as deferred taxation of stock options and low taxation of capital gains. But these breaks directly compound income inequality and starve public programs, and have no significant impact on real private investment. The real choice to be made in this and coming budgets is not between growth and social justice. Rather, we have to ask ourselves what kind of society we want to live in. Mr. Martin must announce long-term reinvestments in programs if the federal government is to maintain strong growth and low unemployment, while helping us achieve our social goals. Andrew Jackson is senior economist at the Canadian Labour Congress.