Economics, Not Politics

(This is a teeny bit technical, but not too much. I hope you read on. If you’d rather not, here’s a summary: Harper chose politicking over math. Politicking bad. Math good. Harper sucks. Curmudgeon mad.)

I knew it wouldn’t take long, but I didn’t think it would happen this fast. It only took 2 days for the Harper government to incense me since I started blogging. It is a result of something they did years ago rather than recently, but the results are finally hitting the fan. Yesterday, Finance Minister Jim Flaherty says this year’s budget deficit will balloon beyond $50-billion, the largest since 1992-1993 under the Mulroney (Tory again) government.

A deficit during a recession is expected, and even encouraged, but $50-billion is a large number that didn’t have to be so large. You see, when the Prime Minister Stephen Harper was campaigning, one of the promises (if not THE promise) he made that helped win him the election was the GST rate reduction. He promised to cut the GST rate from 7% to 5% in two phases of 1% each. According to the gst.gc.ca website, the 2% reduction saved Canadians almost $12 billion in 2008.

Take that $12 billion and subtract it from the $50 billion deficit, and you have $38 billion. A deficit that is much easier to swallow and $1 billion below the previous high water mark of $39 billion.

Assuming you are an average Canadian with an average income and average expenditures, Mr. Harper saved you about $363 bucks last year (that's 12 billion divided by 33 million for you mathematically challenged). That’s around $30 a month, $1 a day. Did you notice it?

Even if you are happy about saving $1 a day, I doubt you actually realized that amount because a reduction in the GST rate will only save you money if you spend money. And a lot of the money you spend doesn’t benefit from the rate cut anyhow. Purchases such as basic groceries, rent, mortgage payments (unless your house is new), health care services, educational services, and certain drugs and medical devices are not subject to the GST. So the real savings that make up that $363 average are probably skewed more towards higher income folks who spend more money on things other than staples.

Mr. Harper would have been better off giving us income tax reductions. Without getting to deep into it, a reduction in the income tax rate gives you more money in hand. You can choose to save that money or spend it. A reduction in the GST rate gives you nothing until you spend money you’ve earned. And here’s where the funny math comes in. When most people have more money in their hands, they tend to spend it. So an income tax cut that costs the government $12 billion in direct income tax revenues doesn’t really cost the government $12 billion because that money gets spent. And when people spend extra money that they are not used to having, they don’t generally spend it on staples. They buy tvs, Ipods, Xboxes, jewelry, and other luxury items that are GST taxable. So the decrease in income tax revenues is partially offset by an increase in GST revenues.

Not only is there funny math in support of income tax reductions, you can target the income tax reductions to the people you want to save the most money. You can lower the tax rates for low income people and increase the tax rates for high income people. Take from the rich and give to the poor. But I suspect the rich contribute to the party and the poor don’t.

Don’t get me wrong, I’m glad my hair cuts, beer, car, PC, TV, and all those luxury items are less expensive now. But I would have preferred to have the cash in hand and it would have been better for all of us in the long run. Plus, next year in Ontario that 5% is becoming 13% on services, new houses, repairs to real property, and other previously Ontario Retail Sales Tax exempt items. Thank you Mr. Harper and Mr. Flaherty with a special nod to Mr. Dalton and Mr. Duncan.

Mr. Harper chose politics over math. He put a big sign in front of a cash register that showed the rate reduction. It’s visible and easy. 7% to 5%. It’s politically smart. But it’s not economically smart. Income tax reductions are. You may disagree. But you’d be wrong.