The great fiscal divide

Globe and Mail Update
Thursday, November 02 – Online Edition, Posted at 11:10 PM EST

The debate

Part 1: Policy, Taxes
Part 2: Corporate income tax; spending
Part 3: Grants to business; debt reduction

Rarely in Canadian history have the two leading parties in an election campaign offered such diverging policies to Canadians across such a wide range of economic and fiscal issues.

The Liberals and the Alliance party are divided on almost everything.

To explore those difference, The Globe and Mail invited economists representing the two main parties to sit down for a taped debate on the key issues.

They two combatants are:

• John McCallum, who is running as a Liberal candidate in Markham, a suburban riding northeast of Toronto. He is on leave from his job as chief economist at the Royal Bank of Canada.

• Mark Mullins, a top economic adviser to the Canadian Alliance. He was a key architect of the Ontario Progressive Conservative party's platforms in 1995 and 1999 and is a former chief economist for a Toronto brokerage.

The debate took place Friday, Oct. 27. What follows is transcript of most of their discussion. A shorter version is in The Globe and Mail Nov. 3 print edition.

Both men began with an overview of their policies before getting into a more detailed discussion.


Mullins: The issue is longer-term growth: raising productivity and incomes for people and families; what program is going to move that faster and more aggressively to a higher growth track long-term; and how we're going to fare out there in the global market place.

Polls suggest that in the United States, [Republican presidential candidate George W] Bush might win and he's got a much more significant tax cut package [than the Democrats]. He's probably a little more aggressive on the growth side.

I would argue that because of Canada's size — roughly a 10th of the U.S. — we need some some advantages. It's not enough just to keep up with the U.S. We may even slip behind them if the Liberals come in with their economic agenda. The key is to move to a faster growth base and offer more opportunities to Canadians.

If you look at the Alliance fiscal plan as one way of looking at the over all economic plan, you've got more and faster tax cuts than the Liberals; you've got more debt relief happening which is going to pay a dividend, certainly in terms of easing constraints at the federal budget level; and the reason why this can happen is you've got more control of federal spending.

That's one of the key differences. The Liberals are on a fairly high-growth spending track. They're going to raise spending by something around $30- or $40-billion over the next few years. Certainly, they're recovering from the days when they were reducing the deficit.

The Alliance basically says we need to control spending over all and we need to shift priorities from less important areas to much higher-priority areas. In that sense, there's a reflection of Canadians values or Canadian preferences, what the voters want to see that they're not necessarily getting out of the Liberal package. So over all, more tax cuts, more debt relief, less spending and — I would argue — smarter spending. And that, in turn, is better for the economy and for people's incomes.

McCallum: It's a pleasure to be here with Mark, who's in something of a unique position. I ran into Stanley Hartt in the airport a few days ago. Stanley used to be chief of staff to Brian Mulroney and he's now a prominent Alliance backer. He told me the party had searched high and low across the whole country to find an economist to defend the flat tax and they could only find one. And that's you, Mark.

I believe the Liberal program is both balanced and fiscally responsible. The Alliance's is extreme and totally irresponsible.

Under the Liberals, we have the biggest tax cut in Canadian history, I believe. And while it's mainly focused on low- and middle-income Canadians, there are also important growth-enhancing elements, such as the removal of the surtax, a one-third slashing of the capital gains tax rate since the beginning of the year, and measures to promote research and innovation.

The problem with the Alliance program is two-fold. It's entirely irresponsible fiscally. By the year 2004-05, their measures add up to four times the amount available. According to the private sector economists [who advised Finance Minister Paul Martin before his mini-budget], the amount available that year is $7-billion. The Alliance proposals, if you add them up, come to $28-billion.

There's absolutely no way this can be accomplished and I believe that Canadians today deserve transparency, truth in numbers, respect in terms of numbers, and they are not getting this from the Alliance whatsoever.

This is not a question of left or right. It's about honesty in the presentation of fiscal numbers and the Alliance numbers are totally out to lunch.

The second aspect is in terms of fairness. We're all in favour of tax cuts. But we do not go to the extreme — further to the right than the right-wing of the Republican Party in the United States — in the most unequal, regressive tax system in the whole of the western world.

On the spending side, the Liberals are far from being drunken sailors. Federal program spending relative to the size of the economy has come down, down, down to the point where it's lower today and projected in the future to be lower than since I was born 50 years ago.

Finally on the debt, the Alliance is proposing $6-billion a year in debt reduction. Well, the Liberals have already exceeded that — $12.3-billion last year and at least $10-billion in the current year. So we are, by our actions, stronger on debt reduction, than is the Alliance proposal.

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Mullins: I think we've got a copycat issue here. We've got the Liberals saying look at this wild tax plan the Alliance is planning — it doesn't add up, it's not transparent and so on and so forth.

The truth is that we came out at the beginning of this year, even before the Liberal budget, and showed our numbers. It does add up and it doesn't involve a number of the things that John thinks it does in terms of either running deficits or spending cuts.

He highlighted two issues — fairness and the size of the Alliance tax cut relative to what's available. We're talking about $125-billion in tax relief over a five-year period. Now the Liberals in their latest economic statement said $100-billion. Our package is obviously larger. It can be financed if you're going to hold the line on spending. I wouldn't call it dramatically different from the Liberal package and unfinanceable or irresponsible. It's very much in the mainstream of where Canadians want to go in terms of tax relief.

Regarding fairness, if you look across all income levels, you're going to find in the Alliance package — fully implemented — a better advantage for lower-, middle- and upper-income Canadians. Nobody is better off under the Liberal tax plan compared to the Alliance plan.

We talked about our tax plan earlier this year. Now they're implementing at least part of it today.

They also moved to lower the low-income tax rate from 17 per cent to 16 per cent for political reasons so they could say, "look, there's the Alliance with 17 per cent, here's 16 per cent over here, so we're better for lower-income Canadians."

What they forgot, and what they continue to forget when they talk about this so-called flat tax — which the [Alliance] tax isn't — is that you've got a much much higher threshold for tax-free income [because] the Alliance is going raise the basic exemption to $10,000 [from $7,231], put the matching spousal exemption at $10,000 and give credits for kids as well.

What you end up with as a package for low-income earners is a better tax environment at 17 per cent, with more of the earnings tax-free than with the Liberals' 16 per cent.

So I would say we have a fairer tax package. It's offering more relief to all Canadians and this issue of flat tax is just an absolute non-starter. This is not a flat-tax package, never was. We'll leave it to the voters to decide: do you want to be taxed at 17 per cent if you earn under $100,000 and 25 per cent over? Or do you want to be taxed at 22 per cent [and] 26 per cent [under $100,000], which is the Liberal equivalent for those tax brackets.

McCallum: [The Alliance plan] is disproportionately favourable to the very high-income people, more than the Republican right is willing to contemplate. To give you one example, a person making $1-million under the Alliance plan gets a $130,000 tax reduction, a person earning $30,000 gets $500. That is out of proportion to any Canadian concept of equity.

It's not that we're anti-tax cuts, but we have to be fiscally responsible and we have to have some sense of fairness and values in this process.

Let me deal with the question of affordability. The only sensible way to deal with this is not by adding up the numbers over a number of years, but looking at the cost on full implementation.

There are three critical numbers. First, for the year 2004-05, according to these private sector economists, the amount available for any new programs is $7-billion per year. Second, the Liberal measures in the economic statement [have been] costed at $6.7-billion. And the third number is the department of finance officials [who have made an estimate of the cost of] the Alliance program and it's $28-billion.

They would have to have $21-billion in expenditure cuts [to finance their tax cut]. They've already protected certain kinds of spending and the list keeps growing — employment insurance is now on the list — so that $21-billion in cuts would have to apply to about $67-billion in federal unprotected spending. So they're talking about a 30-per-cent cut in this unprotected spending, which is totally off the wall, totally different from anything they've said publicly.

I'm not a socialist, but I do object to expenditure cuts that focus on those who can afford it least — aboriginal Canadians, the homeless, people in the poorest countries in the world. Those are the people who are going to bear the brunt of the Alliance program in favour of those at the very top end of the income scale to a degree that's unprecedented in the western world.

Mullins: We've had numbers out since January. They do add up. We put them to an independent adjudicator over at WEFA Inc., one of the forecasters who contribute to the private sector consensus.

Using the consensus revenue forecast, using conservative spending assumptions, and taking into account elements that aren't even in the plan (like privatization receipts, which add even more safety to the plan in the sense of the revenue you expect to have), WEFA says the numbers add up.

We're going to show that explicitly. We've already shown it once, pre-budget. We showed it again after the budget. We'll show it again during this campaign. It is simply untrue that the numbers don't add up.

It's also untrue that the spending restructuring we're looking at is anywhere near the amount of money that John is talking about. We've talked for months now about a $6-billion to $7-billion rearrangement of spending which leaves over all spending rising over time. And we're certainly explicit about which areas we're protecting, which areas we think are wasted money and actually are unproductive, unhelpful for the economy. It's those areas we're going after, and they're certainly not aboriginals, homeless and all these other areas John is pointing to.

In fact, it's the areas that have been highlighted by the Auditor-General. It's the regional grants, corporate welfare, a lot of areas where government spending is inhibiting the economy.

McCallum: Homeless don't get a mention in your [platform] and aboriginals and foreign aid are explicitly put in there for cuts. The fiscal irresponsibility is so obvious and egregious that I'll bet my bottom dollar that you'll have a number of third parties coming out in the course of the election campaign to give numbers similar to mine.

I gave my sources. I don't think the department of finance officials made things up. These are solid numbers.

And by the way, there is the weasel thing. You have ongoing, recurring tax cuts which you finance from sales of Crown assets? Well, that's dishonest, because the money you get from privatization is one-time and if you use that money to finance ongoing tax cuts, you're just leaving yourself open to deficits not too far down the road.

Mullins: Privatization receipts are not in the plan for that very reason.

McCallum: You mentioned them.

Mullins: I mentioned them because that's an additional area for debt reduction, which is appropriate for one-time receipts, therefore it's some of the added comfort you can have with the fiscal numbers that are in the plan.

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Part 2: Corporate income tax; spending
Part 3: Grants to business; debt reduction

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