Thursday, April 20, 2006

Telling the government what to do

For what it's worth, I submitted my opinions on the 2006-2007 budget last night. I believe the deadline has been extended another 24 hours, which means to today, or so the link said last night.

Here is my submission:

To start, I agree with the basic thrust of the government’s priorities outlined in the last election, particularly its promises:

· To reduce the GST;
· To put money into the hands of parents rather than institutions to help with childcare costs; and
· To work with the provinces to establish a wait time guarantee for patients.

In my view, the most important economic challenge over the course of the new government’s term is to deal with Canada’s lagging productivity growth. In this regard, a number of factors need to be addressed.

· First, it is critically important that the Canadian business tax system be internationally competitive, with the overall tax burden appropriate to the level of public services and other government benefits accorded to business. Moreover, we need a tax system that does not skew investment incentives such that financial resources are misdirected into otherwise uncompetitive industries.

In light of this, any proposed tax expenditures (which should be generally eschewed) should be broadly available and not directed at specific industries.

The government should consider measures such as moderately accelerated write-offs for capital investment to encourage investment in new technologies, as well as training incentives for firms and individuals in order to enhance the skills of working Canadians.

Similarly, the personal income tax system must be competitive relative to the bundle of government services and other public benefits that Canadians receive.

Moreover, the various federal and provincial tax benefits must be better integrated to avoid perverse situations where marginal tax rates can reach punitive levels as taxable income levels increase from relatively low levels.

To improve fairness, we should consider assessing income tax on a family basis to remove the penalty that single-income families and many two, but unequal, income families pay relative to families with two similar incomes.

· Second, we must enhance the effectiveness of government, given its large share of overall economic activity, by focussing its efforts on tasks which it does well and exiting areas where its contribution is questionable. It is my suspicion that the underperformance of the public sector has had a major negative impact on Canada’s productivity performance, impeding the rise in living standards that we might otherwise expect.

Government simply must deliver better value for the taxes we pay. It cannot be insulated from the pressures the rest of us face to continuously improve our efficiency and the quality of our work. Clearly, high profile failures, such as the gun registry or the HRDC boondoggle, greatly detract from the effectiveness of government in the absence of any mechanism to quickly modify them or shut them down should they go off the rails.

On the question of fiscal imbalance, there is growing awareness of the mismatch of tax revenues and responsibilities at different levels of government. This issue needs to be addressed and I think the government is on the right track in insisting that it will stick to its jurisdiction and defer to the provinces in dealing with theirs. Obviously, a way of addressing the revenue mismatch needs to be negotiated.

My preference would be for the federal government to vacate the tax space in order for the provinces to directly raise the funds they need to deliver the programs in their jurisdictions. This restores accountability to the level of government that collects the tax and provides the service.

The system of equalization must be transparent and designed to reward success, not failure. In this regard, I feel it is appropriate that if, for example, the offshore oil industry in Atlantic Canada generates new wealth and sources of tax revenue in the region that the region retain the bulk of the benefits for a reasonable period of time rather than be forced to give up the equalization payments it receives on a one-for-one basis. That is a huge disincentive for the region to reduce its dependency on federal equalization payments.

Conversely, since equalization is typically described as a hand up and not a hand out, Canada’s regions must bear some of the risk if their economic development policies render them uncompetitive and drive investment away. I would like to see some time limit put on equalization payments, barring unanticipated events outside their control, to help focus citizens and their governments on finding real solutions rather than continuing to depend on handouts from the federal government.