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Jim Prentice, Canada's presumptive finance minister?

By John Williamson
web posted August 4, 2008

Jim PrenticeIt is no secret in Ottawa that Industry Minister Jim Prentice wants to be Canada's finance minister. Before the last Cabinet shuffle there was a quiet but steady effort to publicly highlight Mr. Prentice's managerial talents and disparage Jim Flaherty's reprimanding of high-taxed Ontario to change policies or risk becoming a have-not province. If Minister Prentice had his way he'd be running finance and Mr. Flaherty would be punted to a second-tier ministry, like industry. It didn't matter that many mainstream economists agreed with Mr. Flaherty, Mr. Prentice was offering himself as a kindler, gentler Conservative.

Recently, the industry minister took another run at Mr. Flaherty by wading into budget territory. He told reporters the federal government has not determined how to allocate proceeds from the recent auction of wireless licences that resulted in an unexpected $4.25-billion windfall. Mr. Prentice said the cash might go to tax cuts, debt repayment or even spending programs. If Mr. Prentice is determined to audition for the finance minister's job he might want to first reflect on the state of Ottawa's finances. Because there should be no confusion in Conservative ranks about what to do with the revenue.

The finance department reported late last month that Ottawa posted a deficit of $517-million in the first two months of the 2008 fiscal year. This news is worrisome even after a decade of Ottawa lowballing its surplus projections. It was no surprise that tax revenues dropped by 4.1% since the Conservatives cut the GST another point and lowered the tax rate on businesses. If Ottawa's financial position is worsening it is the result of poor management and over-spending, not modest tax relief. The 2008 budget claimed Ottawa would limit spending growth to 3.4% this year. Yet, expenditures in April and May grew by 7%. If this continues, Ottawa will be on track to overshoot its budget target by an astounding 100%.

Do Mr. Prentice and his colleagues believe the federal government should increase spending further this year? And how important is reducing the federal government's monster debt? Since 1997, the debt has been cut by $106-billion. That's a good start. But each year $34-billion is still spent on interest charges to service Ottawa's outstanding $457-billlion liability. That amounts to $93-million each day. There is clearly more work to do.

It is folly to suggest a one-time revenue gain -- such as the $4.25-billion generated by the wireless auction -- be used to increase spending. Whatever new program might be created will live long after the cash raised from the auction is spent. As Milton Friedman said, "Nothing is so permanent as a temporary government program."

Whenever a government sells an asset -- in this case wireless spectrum rights -- the additional income should be used to reduce the country's debt liability. Ottawa has the option of allocating the auction revenue at once or spreading it over a decade. The latter move would boost revenue by $425-million a year, however leaving this money on the table increases the likelihood that some of it will be spent instead of going against the debt.

Applying $4.25-billion to the debt will reduce interest payments by approximately $225-million every year. Under the Conservative government's new tax-back guarantee law, all debt-interest savings are used to reduce personal income taxes. This is another good reason why the auction revenue should be used to retire the debt now. Debt relief today will result in lower taxes tomorrow.

Minister Prentice deserves tomatoes from taxpayers. He opened a discussion on increased spending where none is necessary and offered more evidence the federal government doesn't tax to collect the revenue it needs but that politicians always find ways to spend whatever money is collected. Taxpayers can expect spending to spike unless the real Finance Minister, Jim Flaherty, is ready to overrule his Cabinet colleague, reduce debt and keep a lid on spending. If he does not, it won't matter much to taxpayers which Jim is the finance minister after the next shuffle. ESR

John Williamson is federal director of the Canadian Taxpayers Federation.

 

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