Tough budget choices ahead for Tories

The next federal budget should expose how much of the Conservative party’s election platform is motivated by “populist” promises that either cannot, or should not be implemented, John McCallum, the liberal finance critic, said in a breakfast speech at the Economic Club of Toronto on Thursday.

Ottawa is expected to report a surplus of as much as $10 billion, when the federal budget is tabled, likely sometime this April, due to sustained strength in commodity prices. That, McCallum says, means the federal government won’t be able to cry poverty, as some of the provinces have done after a new government took office.

McCallum used the opportunity in front of a friendly group of about 30 people to criticize two of the conservative’s main tax proposals, arguing that the Tory approach could jeopardize Canada’s prosperity.

We need a “Canadian advantage,” he says, which should be built around support for education, innovation and recruiting the best and brightest through immigration. The Tories, he says, are going in the opposite direction by looking to cut funding to these areas.

The former Liberal cabinet minister, who was vice-president and chief economist of the Royal Bank before he entered politics, felt at home with the Bay Street crowd. While he kept his much of his speech focused on immigration and innovation, McCallum’s also had some sharp criticism of the Conservative’s government plan to cut the capital gains tax, as long as the proceeds are reinvested within six months.

But it appears unlikely the federal budget will include this measure. Finance Minister Jim Flaherty all but confirmed this when he steered clear of the topic in his first speech as Canada’s finance minister in early March and later promised further consultation on the topic.

“It was dead in the water from the beginning,” McCallum says, calling the proposal both administratively and fiscally impossible. “If they tried to do it, it would cost ten times more than what they said it would cost,” he says. “You can’t administer that because you have to track every dollar as it goes from asset A to asset B to cottage C and the system cannot do that.”

In order to save face, McCallum says the Conservatives might try to bring in some variation of the program, without suggesting what that might look like.

He concludes, “Either they knew this in advance and they were misleading Canadians or they didn’t know this in advance and they were not competent in devising their policy.”

McCallum also condemned the Conservative’s move to cut the GST by a single percentage point as being nothing more than a vote-grabber. “It may be good politics, but it’s bad policy.”

While McCallum also raised the Conservative’s promise to revoke the Liberal’s measure to reduce the rate on the lowest personal income tax bracket to 15% from 16%, a new report by TD Economics suggests the huge windfall expected in the upcoming budget might allow that cut to stay.

The Conservatives have said they can’t keep the tax cut, which costs Ottawa about $2.7 billion a year, and afford the GST reduction as well. But with extra cash on hand, the Tories could either pay back more debt, spend more, or slash taxes above and beyond the promises set out in their election platform, says TD chief economist Don Drummond. “That would be taking the road less travelled,” he admits, referring to the tax cut. “A surprise, yes, but a very pleasant one.”

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(03/30/06)