Message to Finance Minister Chrystia Freeland: No need to raise taxes

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As next week’s federal budget approaches, speculation is rampant about potential tax increases. Topping the list are a capital gains tax hike, a windfall tax on oil companies and a hike to the top rate of income tax.

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The left-wing Canadian Center for Policy Alternatives proposes over $85 billion in tax hikes by 2025-26, including new annual wealth and financial activity taxes. But even the business-supported CD Howe Institute recommends a net increase of $35 billion in federal taxes in 2025-26, primarily funded with a GST hike.

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These various calls for governments to raise taxes remind me of Mark Milke’s book of a decade ago, “Tax Me, I’m Canadian.” We seem to likes politicians forever picking our pockets.

Since the Confederation, Canadians have leaned on governments to solve problems rather than relying on their own ingenuity. John A. Macdonald’s National Policy was built on the premise that governments did and should control Canada’s destiny: a heavily subsidized national railway, a high tariff wall to protect Central Canadian manufacturing and land grants to fill up the West with immigrants.

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From a modest six per cent of GDP in Macdonald’s time the consolidated spending of all levels of government rose to 14 per cent in 1930. With the Great Depression and post-Second World War reconstruction, public spending funded new priorities in transportation, education, health and social services. By 1968, as Pierre Trudeau became prime minister, consolidated public spending exceeded 30 per cent of GDP.

Further growth in program spending and an explosion of interest expenses pushed expenditure to over 50 per cent of GDP in 1992. Only tough spending cuts brought it back down to 42 per cent in 1998. It has had its ups and downs since then, ranging from 39 per cent in 2007 to 53 per cent in 2020. With pandemic spending coming to an end, public spending is about 43 per cent of GDP, still high by historical standards.

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Are governments really that starved for funds that they need an even bigger share of the economy’s resources? Those proposing higher taxes argue we need massive new social programs like a guaranteed income and tens of billions more for climate-change subsidies. Other would-be tax-raisers argue that the COVID debt needs to be paid back, evidently not realizing that inflation has boosted public revenues so much that most provinces are running surpluses and could reduce debt without new taxes.

What was missed in this discussion is our poor record of government efficiency. The federal government has expanded employment by 30 per cent since 2015 and has hired oodles of consultants to boot. Average employee compensation including benefits is roughly $150,000 per year, higher than in most parts of the private sector. Yet, despite the immense growth in administration, federal executives have succeeded in reaching performance standards of less than 60 per cent of the time. Even so, almost 90 per cent still got their performance bonuses, which amounted to $200 million last year.

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Before jumping on the bandwagon for higher taxes, people need to take a hard look at public spending. When the Liberals took power, federal spending GDP was 14.3 per cent of GDP. It’s now 17 per cent, 2.7 percentage points higher.

No provincial government’s spending has risen as quickly as Ottawa’s. NDP-led British Columbia comes a close second, with its public spending rising from 19.2 percent to 21.2 percent of GDP in the same period. At least BC ran surpluses in most years, but it has hiked taxes — corporate, personal, health, property, carbon, excise and others — to pay for its spending spree. These tax hikes will eventually impact competitiveness. Although BC has had strong investment in residential and LNG investment recently, it has had weak growth in manufacturing, transportation and headquarter operations.

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Other provinces have managed to keep spending from growing more quickly than provincial GDP. Newfoundland & Labrador has seen spending fall most as a share of GDP — by 3.7 percentage points — but the prairie provinces and New Brunswick have also kept spending growth below the rate of their GDP growth.

Overall, it’s the federal government that has the most lacked fiscal discipline — even though it’s the provinces that face the greatest spending pressure from voters who want to see Medicare queues shorten and school test scores improve. But many studies show that differences in spending generally don’t explain differences in performance. What does the result in governments providing better services at lower costs is soft stuff like innovation, better management and a continuous focus on costs.

I don’t expect the federal budget to talk much about government efficiency, but it should. Canadians facing stubbornly high inflation need a break from governments that raise taxes to make up for their ineptitude.