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Higher taxes may be the only solution

Read their lips: No new taxes. Stephen Harper’s Conservatives andMichael Ignatieff’s Liberals keep saying we can gradually eliminate theburgeoning federal deficit without raising taxes.

Read their lips: No new taxes. Stephen Harper’s Conservatives and Michael Ignatieff’s Liberals keep saying we can gradually eliminate the burgeoning federal deficit without raising taxes.

Economic recovery is supposedly going to provide the tax revenues that, along with some judicious cuts in program spending, will put the nation back in the black sometime after 2015. It will all be so gradual you won’t really feel it.

Only children and incurably gentle folk are likely to be taken in by such mendacity. To get some idea of our current deficit problem and the choices we face, we should cast our minds back to 1993. The deficit that year came in at a then record $42 billion, prompting people like the IMF to wonder if we were on our way to becoming a Third World country.

The newly elected Chrétien Liberals did indeed lick the deficit. Economic growth helped, but we shouldn’t forget that the federal government whacked more than $12 billion from program spending over three years as well as chopping social transfer payments to the provinces.

This time, we have a deficit that’s going to hit at least $56 billion. A slowly recovering economy won’t readily generate additional tax revenues. For one thing, the Canadian dollar, which was low enough to spur export gains in the 1990s, is stronger now. And the key U.S. market will be depressed for some time.

Cutting transfers to the provinces isn’t much of a solution either since all but Saskatchewan are running deficits at the moment. Nor is there much room to cut federal spending, given that significant chunks of what Ottawa lays out — $19.2 billion on national defence in fiscal 2010, for example — are more likely to grow than shrink.

So what’s a prime minister to do? Raise taxes, either in the form of GST points or personal levies. A minority government won’t get away with it, but if one or the other major parties wins a majority at the next election, higher taxes will likely be part of any deficit reduction package.

 
 
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