Economic Statement is a step in the right direction but should have gone farther says The Fraser Institute
Contact:
Jason Clemens, Director of Fiscal Studies
The Fraser Institute
Telephone: (604) 714-4544
Email: jasonc@fraserinstitute.caRelease Date: 18 October 2000
VANCOUVER, BC — Although the Economic Statement announced today by Finance Minister Paul Martin contains much-needed changes, particularly with respect to personal income taxes, it does not go far enough in reducing taxes, again failed to prioritize spending, and continues to leave debt reduction to the whim of the government of the day, says The Fraser Institute.
"Mr. Martin's move to accelerate the tax reductions announced in the 2000 Budget, coupled with the additional tax relief announced today, should be commended," says Jason Clemens, director of fiscal studies at The Fraser Institute, "However, the introduction of a fourth statutory personal income tax rate needlessly complicates an already complicated tax system."
Tax Relief as Expected
Unlike the 2000 Budget, there were no real surprises included in the economic statement. The elimination of the high income surtax, the rate reductions announced to the three previous statutory tax rates, the reduction of the inclusion rate for capital gains, and the changes made to capital gains rollover provisions are all positive steps for the Canadian economy, many of which have been long supported by the Fraser Institute.
However, the threshold at which the new top federal statutory rate begins (namely $100,000) is still significantly lower than the threshold at which our southern neighbours assess their top rate-roughly $421,000 Cdn. The maintenance of a relatively low upper threshold by the federal government will do little to stem the flow of some of Canada's brightest individuals to the U.S. where they face much lower tax burdens.
Corporate Taxes
To further boost the Canadian economy there should have been an equally aggressive attack on corporate tax rates as on personal taxation. "Rather than aggressively reduce our corporate tax rates to help Canada achieve a competitive tax advantage, we have simply reduced our corporate tax rates over the next four years to a level generally competitive with our trading partners assuming that they don't reduce their corporate tax rates in the interim," says Clemens.
"This completely ignores the fact that many of those countries have already announced corporate tax rate reductions that will bring their corporate tax burdens below Canada's rates."
No Legislated Commitment to Debt Reduction
The federal government must make a firm, legislated commitment to future debt reduction. The government should continue to allocate a specific amount, namely $3 billion, for the contingency reserve, with any unused portion automatically allocated to debt reduction. In addition, and what was not contained in the economic statement, was a commitment to allocate all unexpected surpluses, whether gained from lower interest costs, higher revenues, or lower expenditures to debt reduction exclusively.
The federal government should be commended for allocating much of last year's surplus to debt reduction and its commitment to follow a similar policy this year. However, it is important to remember that over the previous three years, the federal government chose to spend 84 percent of the unexpected surpluses rather than reduce debt or taxes. "Nevertheless, this change in focus from spending to debt reduction and tax relief is a positive step that will yield positive economic results," notes Clemens.
Spending: A Lack of Priorities
In announcing new spending initiatives, including $500 million each for climate control and additional Canada Foundation for Innovation funding, the federal government again failed to eliminate unproductive spending, such as the $4.1 billion spent in subsidies to Crown corporations. By eliminating this kind of wasteful expenditure, the federal government could have frozen spending and still financed these new initiatives.
Conclusion
"In short, the economic statement (which will cease to exist upon the dissolution of parliament in the event of an election call), moves Canada in the right direction but much too slowly. Greater tax relief, legislated debt reduction, and prioritized spending would move the country further towards economic renewal and prosperity. It is nonetheless a step in the right direction, we just need bigger steps," says Clemens.
Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver, with offices in Calgary and Toronto.
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