Surplus to be used for tax relief

(October 7, 2005) The federal government has introduced legislation that would eliminate a long-standing policy to allocate all surpluses to reducing the federal debt. Instead, future surpluses would be equally split three ways, with extra funds used to cut personal income taxes, spend on social programs and trim the debt.

The bill would affect any surplus over the $3 billion contingency reserve that arises between the time the federal budget is presented and when the government closes its books at the end of the fiscal year in September. The new policy is scheduled to start with the 2005-06 fiscal year.

“Canadians have consistently made it clear that they want us to pursue a balanced approach to how we manage the tax dollars they entrust to us by allocating resources among tax relief, social and economic spending, and debt reduction. This legislation would extend that approach to future unanticipated surpluses,” said Federal Finance Minister Ralph Goodale in a statement.

Under the proposed legislation, one-third of any surplus in excess of the contingency would be allocated to spending priorities approved by Parliament. Another third would be used to deliver tax relief to all taxpayers in the form of a one-time credit. In future years, Ottawa says the tax relief could be made permanent by increasing the basic amount of income that Canadians can earn without paying taxes.

“This approach confirms our commitment to further easing the tax burden of Canadians as resources allow. This is important to promoting productivity and competitiveness, and a better quality of life for all Canadians and their families in the years ahead,” Goodale said.

Ottawa’s commitment to a balanced budget has, more often than not, translated into surpluses exceeding the $3 billion reserve in recent years, the Finance Department explained in a background paper on the topic. Last year, Ottawa asked economist Tim O’Neill to review the Government’s fiscal-forecasting process.

One of O’Neill’s recommendations was that, if the government is to retain its no-deficit rule, it should “adopt a more formal and structured process for dealing with fiscal surprises” by setting out in advance the contingent allocations among tax cuts, spending initiatives and reducing debt from any unanticipated surpluses. Ottawa is following O’Neill’s suggestions almost to the letter, hoping that the new policy will garner votes in the next election.

Reaction came swiftly to Ottawa’s move, with right-wing think tank the Fraser Institute calling it “irresponsible and a “monumental economic mistake.”

“Tax rebates of this nature have been repeatedly shown to have almost no economic impact. Canadian society and the economy will not benefit,” said Jason Clemens, the institute’s director of fiscal studies, maintaining that tax rebates do not improve the incentives for Canadians to work, save, invest, or undertake entrepreneurial endeavours. “Worse still, the government has committed to potentially making permanent some of the tax relief from these rebates by increasing the basic exemption in future years,” he added.

“Canadians would have been far better served had the government delivered reductions in personal income tax rates and reductions in business taxes, both of which would have improved the incentives for economically beneficial activities, such as work, saving, investment and entrepreneurship,”

The feds plan to have the new structure in place in time for the annual financial report in September 2006. At that time, any tax relief related to the 2005-06 surplus would be announced and included on the 2006 notice of tax assessment as a credit amount.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com