3 March 1997
Answering Paul Martin’s Question
The most important announcement in Paul Martin’s anti-climactic budget went largely unnoticed. He said that, sometime soon, he is going to ask us a question. The answer that Paul Martin and his successors adopt will, more than any other single thing, shape government, prosperity and the security of Canadians over the next 50 years. Maybe we should give some serious thought to the answer we want to give.
The question, of course, is what should we do once the budget is balanced. Balance, which seemed impossibly distant only three years ago, is within our grasp. The options are three. We can cut taxes. We can reduce the debt. Or we can increase spending. Here’s at least part of the case for reducing the debt, and then cutting taxes.
Sometimes it is vital that governments be able to borrow. For instance, when the economy goes into recession, governments need to do some modest borrowing to offset lower tax revenues. Then they can look after the increased spending that hard times bring. Unemployment insurance and welfare payments, for instance, go up when the rest of the economy slows down. Being able to borrow helps to smooth out these swings and roundabouts.
More importantly, there are times when society is faced with an unusual circumstance, an external shock, a big cost that is rightly shared across several generations. World War II is a good example. The benefits of winning that war have now reverberated across five decades, and will continue for some time yet.
But government’s ability to borrow is not limitless. When they accumulate too much debt, they reduce their ability to borrow when they really need to. And that makes us all vulnerable. Our debt is at the sort of level where further borrowing is prohibitively expensive.
If we want to be able to deal with future crises without impoverishing future generations, we must reduce the debt now. After all, the economic situation is the most promising it has been in years, and as John F. Kennedy said, the time to repair the roof is when the sun is shining.
Nor is this concern about the future an abstract one. In 15 years or so the boomers will begin to retire. The following twenty years will see huge numbers of people retire, with relatively few people in the working population to support the increases in pension, medical and other costs that this will entail. This is precisely the sort of massive social change whose cost needs to be shared across the generations. But if we don’t run major budget surpluses now to reduce our debt, we will condemn our children to pay these costs out of their own pocket, instead of spreading them out equitably through responsible government borrowing.
So debt reduction should be the first priority. But tax cuts also have an important claim. That’s because taxes and unemployment are intimately linked, and unemployment is our single biggest social and economic problem today.
Forget the economic illiterates who want to get the government to “create jobs” by taxing you and using the money to hire people to build “infrastructure.” This is just the bad old make-work project under a fancy new name. It costs a lot per job created, the jobs don’t last, and people rarely get valuable new skills.
Economics and common sense both tell us that the economy works better when we make our own decisions about what to do with our money, rather than letting government take it and spend it on what bureaucrats and politicians think is important. Research shows that, in an economy where government takes 30 per cent of GDP in taxes, the unemployment rate will hover around six per cent. Push up the tax take by another ten per percentage points, to 40 per cent of GDP, and the unemployment rate will double, to 11 or 12 per cent.
Our American neighbours send about 30 percent of GDP to their governments and, lo and behold, their unemployment rate is about five and a half percent. Canadians ship off around 37 per cent of GDP to their governments. What do we get in return? An unemployment rate of around ten per cent.
Taxpayers have already made a huge contribution to deficit reduction. Ottawa’s annual revenues will have gone up by over $28 billion between 1993 and 1998. Spending cuts, by contrast, will have only amounted to about $16.5 billion over the same period.
Mr Martin, your answer is that debt reduction and tax relief are the best job creation program going.