‘Prudent planning’

By Aaron Wherry - Thursday, November 10, 2011 at 8:30 AM - 3 Comments

Scott Clark and Peter DeVries find the Finance Minister’s budget update to be “lacking in transparency, accountability, and a realistic assessment of economic and fiscal prospects and risks.” And they suggest Mr. Flaherty start planning like Paul Martin did.

Mr. Martin’s lesson was simple. Once you have chosen the policy actions you believe are required, and given the economic assumptions, choose “risk adjustments” or “allowance for prudence” that will virtually guarantee you will not miss the target. Such a situation is “win-win” for the government. If the economy turns out better then you get credit. If the economy performs as bad as assumed you also get credit for your “prudent planning” …

Mr. Flaherty wants to now claim that he will eliminate the deficit in 2015-16. This is a mistake because the risks and evidence are stacked against this happening. It is virtually certain that he will have to revise his planning assumptions before or in the 2012 budget. It will be even more embarrassing if he has to revise it immediately after the budget.

An opportunity to show real leadership

By Aaron Wherry - Friday, November 4, 2011 at 10:30 AM - 3 Comments

Scott Clark and Peter DeVries lay out what the Harper government should do with its fall economic update.

The current commitment to eliminate the deficit in 2014-15 would be discarded. It is neither realistic nor necessary to eliminate the deficit in 2014-15. Eliminating the deficit two or three years later would be more realistic and acceptable in the current economic environment…

A commitment to reallocate these savings from the program expenditure reviews to new initiatives to support research, investment, innovation and infrastructure in a federal-provincial partnership … A commitment to begin the difficult but necessary process of tax simplification and reform to support efficiency, economic growth and job creation. The government would commit to use the savings (which would be substantial) to lower both personal and corporate income taxes, thereby supporting economic growth and job creation.

Stephen Harper lectures the world

By Aaron Wherry - Thursday, October 13, 2011 at 2:50 PM - 13 Comments

The Prime Minister calls on Europe and the G20 to get their respective and collective houses in order.

Events in the summer of 2011 have made it clear that global economic challenges are by no means behind us. What started as a sovereign debt crisis in smaller countries in Europe has now spread, causing extreme stress in the European financial sector and threatening global growth. Unfortunately, this time, the policy response to our shared challenges has not been as strong and co-ordinated as it needs to be. This slow response has resulted in missed opportunities, with each missed opportunity increasing the cost and difficulty of resolving the crisis.

We cannot afford any more missed opportunities.

Last month, Scott Clark and Peter DeVries noted that Mr. Harper was among those leaders calling on “surplus” countries “to increase their expansion of domestic demand” and thus wondered whether the Prime Minister was willing to participate in a global stimulus package (to the tune of $41 billion).

Idea alert

By Aaron Wherry - Wednesday, October 12, 2011 at 9:44 AM - 11 Comments

Scott Clark and Peter DeVries take on EI premiums.

Simply put, the EI premium rate is a bad tax – probably the worst tax that the government has available to raise revenues. It inhibits employment and economic growth; it is unfair in its impact on low-income workers; it is extremely complex to calculate and administer…

The best option would be to get rid of the EI premium rate altogether and replace it with an alternative source of revenue. One way this could be done is by replacing the lost revenues, about $20 billion, by increasing the GST and corporate income tax rates.  This would address the problem of the working poor by spreading the burden over much larger tax bases.  In addition, the GST low-income tax credit could be increased, sheltering these individuals altogether.

Cutting the right taxes

By Aaron Wherry - Friday, September 23, 2011 at 11:00 AM - 61 Comments

Scott Clark and Peter DeVries propose a new tax plan to fix the government’s structural deficit.

First, the current plan has only slightly reduced the high effective marginal tax rates imbedded in the personal income tax structure, which seriously inhibit labor force participation. Without getting into detail, what is required is a lowering of the marginal tax rates. This could be expensive. Lowering all rates by 1 percentage point could cost $5 billion annually. Getting rid of all the special tax preferences introduced over the past five years would be a start.

Second, the government should restore the two points to the GST bringing back the $13 billion that was lost. This would more than pay for the cut in tax rates for all Canadians but would also allow a larger reduction in the corporate tax rate than is currently planned.

Not the best estimates

By Aaron Wherry - Friday, August 12, 2011 at 4:35 PM - 3 Comments

In lavish detail, Scott Clark and Peter DeVries explain what’s wrong with federal budget reporting to Parliament.

The reality is that Parliamentarians and Canadians in general are in the dark about what the Government is planning to spend this year. Even worse, the Government is making no effort to clear up the confusion and provide greater transparency and ultimately greater accountability.

Add another to the enemies list (II)

By Aaron Wherry - Thursday, February 11, 2010 at 1:22 PM - 83 Comments

Michael Ignatieff selflessly beseeches the Prime Minister to spare the rest of the population and direct all anger at him.

I was shocked to read that Prime Minister Harper has again attacked a private citizen for expressing views on public policy that are perceived to be at odds with his government’s agenda. The Prime Minister’s behaviour is beneath the office he holds.  As an elected Member of Parliament, I am used to being on the receiving end of Mr. Harper’s style of politics.  But I draw the line at Mr. Harper’s attacks on members of the public.  The Prime Minister must withdraw these comments and apologize to Mr. Clark.

Whether or not one agrees with Mr. Clark’s advice, he is the CEO of one of Canada’s largest and most respected financial institutions, and he should be free to offer his opinion on Canada’s fiscal policy without fear of reprisal to his business or personal smears to his reputation from the Conservative government. This is the second time in a week that the Prime Minister has crossed the line in civil public discourse by maligning the reputation of a citizen for disagreeing with the Conservative government. Last week, former finance official Scott Clark was attacked by the Prime Minister, adding to the long list of non-partisans like Linda Keen, Peter Tinsley and Paul Kennedy who have been maliciously accused of partisanship for voicing their disagreement with his government’s policies.

Add another to the enemies list

By Aaron Wherry - Thursday, February 11, 2010 at 12:12 PM - 68 Comments

Be careful what you say in public.

A member of the Canadian Council of Chief Executives, Clark recounted a recent meeting of the high-powered, 150-company group. ”We had a meeting two weeks ago, and almost every single person said raise my taxes. Get this deficit done,” Clark said during a question-and-answer session at the TD Ameritrade Inc. conference. He spoke about a prebudget consultation he recently had with Harper. ”He doesn’t listen, but you get to chat with him,” the TD Bank chief executive remarked…

A day later, an email labelling Clark a rich supporter of Liberal leader Michael Ignatieff went out from the PMO to senior Conservatives. Entitled “Millionaire Ignatieff Economic Czar Calls for Higher Taxes,” the email pointed out that Clark had been one of several financial experts who attended a dinner last spring to provide economic advice to Ignatieff. ”Yesterday, another member of Liberal party leader Michael Ignatieff’s so-called `economic brain trust,’ Bay Street banker Ed Clark, lectured Canadians from sunny Florida on our need to pay higher taxes,” the PMO note said. It went on to say that Ignatieff will use statements from “his well-heeled economic advisers” to justify massive tax hikes for “working- and middle-class Canadians.” The email ended: It’s been reported “that Michael Ignatieff’s Bay Street buddy Ed Clark earned $11 million in 2009. He can afford higher taxes. Can you?”

'There's no other reason why you couldn't have done both'

By Aaron Wherry - Wednesday, January 27, 2010 at 11:31 AM - 29 Comments

The Hill Times talks to Scott Clark, a former deputy minister of finance, about the need to prorogue Parliament before delivering a budget.

Scott Clark, a former Finance deputy minister, however, said that Finance ministers have always engaged in pre-budget consultations and while the March 3 budget will be an important one that requires consultations in order to understand the public mood and “not surprise anybody,” governments are always able to plan their budgets when the House is sitting.

“I don’t think prorogation has anything to do with anything, if you can’t plan a budget with the House sitting, that strikes me as a bit odd. Every budget that I’ve ever worked on, and I worked on a lot, the House wasn’t prorogued. The minister carried on doing his job and we planned a budget and I don’t see why this particular budget requires more consultation than any other budget that this government has done, quite frankly, and there’s no other reason why you couldn’t have done both,” said Mr. Clark.

… Mr. Clark said consultations are “good politics but at the end of the day not much of that actually sees the budget.”

Note to Stephen Harper: It’s not so easy cutting federal spending

By John Geddes - Friday, January 22, 2010 at 4:42 PM - 135 Comments

Federal spending cuts are coming. Prime Minister Stephen Harper promises them. Finance Minister Jim Flaherty is to map out the strategy—though maybe not many specifics—in his March 4 budget. Stockwell Day, in his new job as Treasury Board President, is supposed to stare down any bureaucratic resistance.

But where will the Conservatives cut? Start anyplace, a jaded taxpayer might say. After all, federal governments haven’t exactly looked frugal in recent times. Even before last year’s massive deficit-financed stimulus injection to fight the recession, spending rose more than four per cent a year, under both Liberals and Tories, in six consecutive budgets.

Yet the notion that layers of glistening blubber are just waiting to be hacked off is only a comforting delusion. There must be fat, sure, but the federal books are well marbled—the less-than-unassailable spending tends to be finely integrated into essential programs. No use pretending that finding savings huge enough on their own to balance the books again is merely a matter of will.

In fact, some of those most experienced on the subject think the task impossible. Start with two key architects of the famously successful deficit-slaying strategy overseen by Paul Martin when he was finance minister: Scott Clark, who was Martin’s deputy minister from 1997-2000, and Peter DeVries, the department’s fiscal policy director from 1990-2005.

Now retired from Finance, Clark and DeVries shared with Maclean’s a draft version of budget analysis they recently co-wrote. In it they offer trenchant observations on everything from fiscal projections (“One certain thing about a medium-term deficit forecast is that it will be wrong…”) to the hot-button issue of appropriate tax levels (“…a credible budget will require that taxes be raised.”).

Where to cut, however, is the most pressing issue of the moment. But first, how much? Their starting point is that the Parliamentary Budget Officer is not far off when he estimates the structural deficit—how deeply Ottawa will remain in the red after the stimulus gush is spent and the economy is reasonably healthy again—at about $20 billion.

So $20 billion at least must be reduced from spending, assuming Harper and Flaherty mean it when they vow not to hike taxes. Overall program expenses run about $208 billion. But $108 billion of that is transferred to provinces and individuals, and the Tories promise not to significantly cut those payments. That leaves $100 billion to be sliced by a fifth.

And that might seem, while pretty tough, within the realm of the possible. Except in the real world the whole $100 billion is not on the butcher block, as the chart at the bottom from Clark and DeVries shows.

They point out that fully $18 billion pretty much can’t be touched. That includes, for example, more than $2 billion spent by Canada Mortgage and Housing, money which is subject to long-term agreements, and more than $3 billion in federal payments Ottawa must make to Newfoundland and Nova Scotia under offshore energy deals.

Which still leaves more than $80 billion to shrink by a quarter. However, Clark and DeVries subtract another $35 billion as “sensitive”—programs like Defence, First Nations, and student assistance. Armchair fiscal disciplinarians will scan down this portion of their table and exclaim, “Aha! These aren’t areas that truly can’t be cut, they’re just sacred cows.”

And there’s something to that. But at the very least the “sensitive” list reminds us that wide swaths of spending can’t be seriously cut without inflicting real damage. Canada still lags in R & D—so do we really want to whack research? In the post-Haitian earthquake era, and with our solemn commitments to Afghanistan and Africa, would we really contemplate deep foreign aid cuts? Does anyone believe we spend too much on the homeless?

So what’s left as the prime base for restraint? Clark and DeVries tally up only about $47 billion. Not even the most hard-nosed government is going to whack $20 billion from that total. Based on their experience of the program review imposed by the Liberals in 1994 to find savings, the two former mandarins suggest a five-per-cent reduction, or about $2.5 billion, is more reasonable.

Five per cent might sound like a pittance. After all, back in his landmark 1995 and 1996 budgets, Martin mapped out a fiscal austerity program that set a target of 22 per cent less spending across all federal departments by 1998-99 than in 1994-95. But that (and here I’m making my own observations rather than following Clark and DeVries) never happened. Instead, program spending declined six per cent in the key 1995-1999 period. So how did the Liberals balance the books? The answer: tax revenues soared by 26 per cent in those five years, thanks to steady, strong economic growth.

Growth of that sort, however, is not in anyone’s mainstream forecast for the next few years, so the Tories can’t credibly hope the fiscal problem will be solved that way again. That leaves the solution Clark and DeVries arrive at: increase taxes. More on that in a future posting.

Source: Public Accounts of Canada 2009