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government economic policy

Economic policy of the Harper government

Since its election to power on January 23, 2006, the Conservative Party of Canada led by Prime Minister Stephen Harper adopted several positions and policies in regards to the economic issues of Canada including various tax cuts, exemptions and credits as well as discussing the issue of fiscal imbalance among provinces and measures to cope with more troubled sectors of the Canadian economy.

2006 Budget

The first federal budget of the Conservative government was released on May 2, 2006 by Finance Minister Jim Flaherty.

GST cut

The Conservative government promised to lower the federal Goods and Services Tax from 7% to 6% for the first budget and to lower it to 5% by 2011. There were some concerns from activists, that the cut would only benefit the rich. Some retailers have raised their prices to compensate. Finally, there were also possibilities that some provincial governments take advantage and raise their provincial taxes. During the 2006 election campaign, the Martin government proposed income tax cuts for lower-middle income earners. The Liberals have claimed that the GST cut would effectively result in a tax increase for those in the lower-middle income bracket. The Conservatives argued that the GST cuts would benefit all Canadians, including low-income earners and those outside the workforce who do not pay income tax.

The first GST cut went into effect on July 1, 2006, and no provinces have raised provincial sales tax as of yet. The second cut was later announced in the 2007 Throne Speech and officially confirmed on October 30, 2007 during an economic statement update on the country finances.

Reception

It was met with dissent by the Liberal and New Democratic parties and mostly positive reception from the Bloc. The Liberals and NDP voiced disapproval over the Conservatives following through on their election promise to replace the Liberals child care policy with their own, and for replacing Canada's $4 billion environmental policy with a $2 billion "made in Canada" plan of their design. The budget was met with widespread support amongst the business community and polling indicated that a clear majority of Canadians approved of the budget.

Vote

While it initially appeared that the only way the Conservatives' budget would pass would be with the support of the Bloc Québécois, the budget passed third reading without dissent on June 6, 2006 when the members of the Opposition accidentally failed to stand after the Deputy Speaker of the House called for debate. Because there were no speakers for the Opposition, the budget was declared passed with unanimous support and no recorded vote and thus forwarded to the Senate for approval. This marked the first time in Canadian Parliamentary history where a government's budget passed unanimously on the third and final reading.

2006 surplus

On September 25, 2006, the Conservative government announced a $13.2 billion surplus within the fiscal year. The full amount was used to pay out the country's debt which currently stands at just under $500 billion.

In a financial update on November 23, 2006, Finance Minister Jim Flaherty wanted to eliminate the country's net debt by 2021 calling it "a matter of fairness for future generations". He also promised to lower taxes including, personal income taxes, employment insurance rates, and corporate tax revenues. He had also considering a move to split the income of married couples for tax purposes.

Income trusts

In the 2006 election, the Conservatives promised not to tax income trusts. . On October 31, 2006, Flaherty announced a new tax on income trusts created after that date. The new tax regime would apply to existing trusts in 2011. Several companies such as Telus and Bell Canada Enterprises had announced their plans to convert to income trusts, but are now expected to withdraw those plans. However Brent Fullard of the Canadian Association of Income Trust Investors points out that at the time of the announcement Telus and Bell Canada Enterprises did not pay any corporate taxes nor would they for several years. Had Bell Canada Enterprises converted to a trust, it would have paid $2.6 billion in the next four years versus no taxes as a corporation.

Subsequent to the October 31 announcement by Flaherty, the TSX Capped Energy Trust Index lost 21.8% in market value and the TSX Capped Income Trust Index lost 17.6% in market value by mid November 2006. In contrast, the TSX Capped REIT Index, which is exempt from the 'Tax Fairness Plan', gained 3.2% in market value. According to the Canadian Association of Income Funds, this translates into a permanent loss in savings of $30 billion to Canadian Income Trust Investors.

Economist Yves Fortin has challenged the reasons for the change in tax regime announced by Flaherty and disputes the Harper government assertion that the Trust structure has led to lose of tax revenue because of trust conversions in his research paper. Income Trusts and Tax Leakage: Is there a problem?

Analyst Gordon Tait has also raised concerns about the lack of consultation and misconceptions surrounding the change in tax policy on Trusts in The Inconvenient Truth About Trusts

A December 11, 2006 Income Trust Report by PricewaterhouseCoopers reviewed the surveys and studies conducted in 2004 and 2005, the economic benefits and impact of income trusts in Canada. The report concludes that Income Trusts do have a place in Canadian capital markets and the 'Tax Fairness Plan' is unfair to Canadian Investors who hold Trusts in a tax-deferred Registered Retirement Savings Plan or a Registered Retirement Income Fund

In a year-end interview with the Canadian Press, Harper mentioned that this was "the toughest decision for the government". The Canadian Press voted the Harper Government and Jim Flaherty 'Business Newsmaker of 2006' for the announcement to tax Income Trusts on Halloween .

Analyst Cameron Renkas refutes the Department of Finance assertion that the United States and Australia have taken action to shut down flow-through structures. In his research paper Digging Deeper he gives a perspective on how the United States taxes publicly traded flow-through entities and Master limited partnerships, the US equivalent of Canadian Income Trusts.

In a January 12, 2007 paper Yves Fortin outlines his concerns regarding the claim of tax leakage. Finance Minister Jim Flaherty stated in his October 31, 2006 policy statement "If left unchecked, these corporate decisions would result in billions of dollars in less tax revenue for the federal government to invest in the priorities of Canadians, including more personal income tax relief" but Minister Flaherty has not documented his allegation nor has he cited any research to back up his claim. Mr. Fortin's paper A Recipe For Tax Loss gives several examples on how the tax on income trusts could lead to a loss in government tax revenue, not a gain.

Analyst Dirk Lever wrote on January 15, 2007 "We cannot understand why any Canadians would support double taxation of retirement benefits - it affects all of us eventually". Mr. Lever has also cited several flaws in the Conservative government's policy in his research paper Deep Dive into Tax Issues: Canadian Pensioners Taxed Twice on Canadian Corporate Dividends In the report Mr. Lever asks:

  • Why are Canadian Pension Benefits are taxed twice on Canadian Corporate Dividends?
  • Why are foreign investors allowed more favorable tax treatment than Canadian retail investors?

Special hearings by the Finance Committee commenced January 30, 2007. John McCallum, the Liberal Finance critic has called on Minister Flaherty to explain the reasoning behind the change in Income Trust Tax policy . In a February 8, 2007 news release John McCallum is quoted "Essentially they released close to a thousand pages of public documents, not one of which brings Canadians any closer to understanding what type of information or calculations led the Minister break his election promise and tax income trusts, either the Minister is in contempt of the committee’s motion or he had absolutely no data from his own department before shutting down the sector and destroying tens of thousands of Canadians’ life savings. The first possibility is disturbing, the second is deplorable ." The Conservatives have the support of the Jack Layton and the NDP on this issue.

In a July 9 2007 interview on Business News Network, former Conservative Alberta Premier Ralph Klein criticized PM Stephen Harper and Finance Minister Jim Flaherty for their mishandling of the Income Trust issue and for not keeping their word on Income Trust taxation. According to the Canadian Association of Income Trust Investors the change in tax rules cost investors $35 billion dollars in market value. Stephen Harper specifically promised "not to raid Senior's nest eggs" during the 2006 Federal Election.

2007 budget

Budget summary

Flaherty presented the 2007 budget on March 19, 2007. No income tax or GST cuts were announced but there were tax credits (of up to $310 per child) for some families with children under 18 . It was confirmed that the budget will passed the House of Commons as the Bloc Québécois supported it due to the additional money that the province of Quebec will receive as part of the equalization payment system.

The budget passed 174 to 109 in the House of Commons in first reading. It would later pass the second and third readings in June.

Reception

Quebec Premier Jean Charest had applauded the budget, as his province would receive over $2 billion dollars in additional equalization payment. However, Nova Scotia Premier Rodney MacDonald and Newfoundland and Labrador Premier Danny Williams argued that Harper broke a written promise to shield revenues from oil and natural gas revenues that the two provinces are receiving; Harper has denied this and accused Williams of misinforming the province In addition, Saskatchewan Premier Lorne Calvert argued that his province will receive no new money and alleged that the Conservatives were favoring Ontario and Quebec at the expense of other provinces, which MP Maurice Vellacott has disputed. Other premiers including New Brunswick's Shawn Graham, British Columbia's Gordon Campbell had some reservations. However, Ontario Premier Dalton McGuinty said that the budget represented "real progress" for his province.

During the second vote on the budget Conservative MP Bill Casey voted against the budget in protest of the treatment of the 2005 Atlantic Accord on offshore revenues. He was removed from the Conservative Caucus afterwards. . Premier MacDonald later urged all his province's MPS to vote against the budget after a letter Flaherty that was published in a Nova Scotia newspaper. 9 of the 11 MPs voted against it in the third reading. . After the 2007 passed, the government started to work on a comprise with Nova Scotia to settle the dispute. Many Ontario-based and Western-Canadian columnists have supported Flaherty's budget, citing figures that indicate that the per capital income in Newfoundland and Nova Scotia has improved significantly, at the expense of Ontario, and that allowing the Maritime provinces to keep both equalization payments and resource revenues would hurt Ontario even more.

October 2007 economic statement

On October 30 2007, the Conservatives tabled an economic statement (similar to a mini-budget) and announced various tax cuts and exemptions. Overall, the government proposed a total of $60 billion in tax cuts over five years, including $14 billion in corporate tax cuts by 2012 (or a drop of 33%), a 1% drop of the GST to 5%, an increase of the basic personal tax exemption to $10,100 per year by 2009. The stated goal of the corporate tax cuts was to set Canadian corporate tax rates as the lowest in the G7, although this would require the provinces do matching tax cuts. The lowest personal tax rate will be reduced from 15.5% to 15%, effective 1 January 2007 back to the same level as when the Conservatives were elected in 2006. Economists said that with the large surpluses the federal government accumulated as well as high tax levels, there was another room for significant tax cuts.

The opposition parties criticized the mini-budget as the NDP leader Jack Layton mentioned that the budget did little for impoverished Canadians, and that big corporations such as oil companies and major banks will receive hefty tax breaks. The Liberals were critical of the GST cut as being not an efficient tax-relief but did praise the corporate tax cuts. The mini-budget, a confidence motion did pass 127-76 but without support of any opposition party as the Liberals abstained from voting as they did with the Fall 2007 Throne Speech.

2008 budget

Highlights

The 2008 budget was tabled on February 26, 2008. No new tax cuts were announced in the budget, but Finance Minister Jim Flaherty announced the creation of a new Tax-Free Savings Account, where an individual can deposit up to $5,000 a year. Flaherty said that it is the "single most important savings vehicle since the introduction of the RRSP". Funding was also announced for public transit, infrastructures, hiring new police officers, the reconstruction of Afghanistan, a new Student Grant Program (replacing the Millennium Scholarship Fund) and for the manufacturing sectors. In addition, the government announced the creation of a new independent crown corporation to administer the Employment Insurance System while gas tax rebate fund to the cities was made permanent. 10.2 billion dollars will be spent on the payment of the national debt.

Reception

As did in the past, the 2008 Conservative budget was met with mixed reactions. Liberal leader Stéphane Dion, while criticizing the budget as modest and being "one mile wide" and "one inch deep", said that the party will support the budget due to measures announced surrounding the manufacturing sector as well as environment due to avoiding a spring election. Both the Bloc Québécois and the NDP announced that they were voting against the budget.

The NDP explained that the budget failed to address the need for average workers while the winners were banks, polluting industries and the well-off. Social programs got one-time commitments while corporate tax cuts were granted for many years. They further mentioned that tax cuts for big business take priority over new spending on the order of 6 to 1.

The Bloc cited that there was insufficient funding for the forestry sector and no major announcements for the province of Quebec.

Ontario Finance Minister Dwight Duncan mentioned that the budget came short in regards to the manufacturing sector and told that it was "missed opportunity for Ontario and Ottawa to work together during a tough economic period". Buzz Hargrove, from the Canadian Auto Workers Union also mentioned that the budget was a step in the wrong direction for the auto industry Quebec Finance Minister Monique Jerome-Forget also criticized the budget by saying that it does not reflect the priorities for Quebec including the province's forest sector and post-secondary education. The Minister did praised however the permanency of gas tax rebate for the municipalities.

Canadian Taxpayers Federation director John Williamson mentioned and applauded that the registered savings plan was "very good" for the middle class. Economist Andrew Jackson, from the Canadian Labour Congress, mentioned however that the plan will give little to the average worker while Don Scott, a taxation specialist, added that the program may incite some investors to contribute less to their RRSP. The creation of the new savings account also had positive reviews from several Canadian newspapers including Le Devoir, La Presse, The Globe and Mail and the National Post. Aaron Freeman, policy director for the Environmental Defence, criticized the government for having no clear direction on the environment making reference to the suspension after 2008 of the tax-rebate program on fuel-efficient vehicles but praised the funding for transit and for the protection of consumers from toxins in products.

Softwood lumber dispute

In late-2006, the government led by Trade Minister and former Liberal Minister David Emerson, settled a lengthy dispute with the United States over softwood lumber in which its southern counterpart paid back nearly $4 billion dollars in tariffs.

Manufacturing and forestry sectors crisis

During the Throne Speech, Harper also addressed issues surrounding the economy because of difficulties in the manufacturing and forest sectors due to the loss of numerous jobs at several companies including the 3 majors automakers in the United States and several small to large forest companies over the past few years due to lower US demand, a stronger Canadian dollar, the softwood lumber dispute, rapidly rising gasoline prices since 2003 and growing fears of a US recession caused by a mortgage and housing crisis. On January 10, 2008, the government announced a $1 billion relief fund for single-industry communities that were hit hard by recent closures particularly in the forest and manufacturing industries but also the fishing sector. The funding, coming from a budget surplus for the fiscal year, was to be split between the provinces and territories based on the proportion of the population and not by the number of jobs. The plan was to focus on job training and economic development creation. However, the plan and funding is conditional pending that the 2008 federal budget would pass legislation.

While some praised the plan as a good step in helping the industries affected by the mass closures, the budget approval condition imposed by Harper drew heavy criticism from the Opposition parties, union groups and some provincial politicians some them calling it an "election platform". Ontario Premier Dalton McGuinty and Quebec Premier Jean Charest also mentionned that the funding is a small fraction of what both provinces had invested in total in the troubled sectors and Canadian Auto Workers Union President Buzz Hargrove mentionned that it would not even be enough to upgrade a single auto parts plant. Dave Coles, president of the Communications, Energy and Paperworkers Union mentionned it would take over $10 billion in federal aid to make significant positive impacts and improvements. The funding was made official in the 2008 budget which also featured the extension of the accelerated capital cost allowances for businesses until 2012-13.

Fiscal imbalance

During the 2006 campaign, Stephen Harper promised the provinces including Quebec and Ontario to deal with the issue of fiscal imbalance. When the budget was announced, there was commitment to deal with the matter but little money was used for it. No funding was used when Finance Minister Jim Flaherty announced a $13 billion surplus. The Bloc Québécois has threatened to topple the government, if the Tories didn't give an additional $3.9 billion to the province. Support for the Conservatives in the province was up during the election due to the promise by Harper to deal with the matter.

On January 16, 2007, an article from Montreal's newspaper La Presse reported that the federal government would give an additional $1.5 billion in transfer payments with another $500 million dollars for post-secondary education and infrastructures.

Several premiers from other provinces have criticized the plan. Saskatchewan Finance Minister Andy Thompson mentioned that the government was using revenues from the oil industry of the West in order to gain votes in Quebec.

During the 2007 budget, on March 19, 2007, Flaherty announced an extra $2.3 billion will go to Quebec, while some provinces will get extra money for social policies.

In July 2008, the government concluded an infrastructure deal with Ontario until 2014 worth over $3 billion. Much of the funding would be used mostly for infrastructure repairs and upgrades including the Trans-Canada Highway as well as for rapid transit projects in the Kitchener-Waterloo area and broadband coverage in rural areas of eastern Ontario. . On the same month, a Crown share dispute over oil royalties was resolved with Nova Scotia getting a total of $870 million.

See also

Footnotes

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