Wednesday, March 18, 2009

David Dodge indicts the GST cuts

A few points regarding this interview with former Bank of Canada governor David Dodge. It's significant that he's spelling out a much longer term scenario for economic recovery, sounding more realistic than those in leadership positions at the federal level at the moment, pointedly disagreeing with Harper and current Bank governor Mark Carney who have both been, until Carney hedged this weekend, optimistic about a relatively quick turnaround. Dodge also sounds a little more in line with the Obama investment strategy, calling for more of a longer term investment approach rather than what we've got now, a "bridge" type of stimulus that assumes economic recovery within a few years.

What's quite striking though in Dodge's interview, with the political ramifications, are his remarks on the Harper GST cuts:
As recovery takes hold, Ottawa could then raise taxes a bit – by, say, increasing the GST by a percentage point – to nurse the country's books back to health.

“A little bit of tax here and there would do it,” Mr. Dodge said.

He always opposed the federal government's move to cut the goods and services tax by two percentage points in the first place. The hole the tax cuts made in government revenue left Ottawa with a structural deficit at the end of the 2007-2008 fiscal year, he said – even though the Finance Department won't admit it.

So, raising the GST to make up for recessionary spending “is a very sensible way to do it.” (emphasis added)
Structural deficit. It's clearly not a stretch to now say that this foolhardy GST cutting policy, for short term political gain (how's that working out for you, anyway?), is proving to be one of the worst decisions this government could have made. There were economists decrying it at the time ("...virtually every respected economist in Canada opposed the Harper government's cuts in the GST."), the kind of canaries in the coal mine that we're discovering were saying the right things in the U.S. but again, no one listened to them. We had our own little version of that too.

Dodge also touches on other major issues, suggesting "...permanent, painful contraction of several mature industries such as automobile production and newsprint, and a sober reassessment of investment in oil sands." In short, Dodge speaks to the need for a vision, on the federal scene in particular. We know who doesn't have one, that's for sure.