Liberal/NDP deal no “Faustian Bargain”

April 28, 2005

So there is an agreement in principle between the Liberals and the NDP.  In return for helping to prevent this government from falling before it can even get the 2005 Budget passed, the NDP has extracted promises of about $4.6 billion in new spending, plus a roll-back of future tax cuts for big business.

Many in the media are responding to this deal as though it were a fate worse than death. Funny. The deal would actually put needed dollars towards environmental protection, affordable housing, foreign aid, and some relief for students (among other things). Does this look like the end of the world to you?

Why is this deal getting such bad press? The CCPA has looked over the publicly-available information, and we think that the deal is affordable, fiscally responsible, and makes important progress toward meeting the goals that the Liberals campaigned on and claim they share with the NDP.

At a cost of $4.6 billion over two years, with plenty of foreseeable budget surpluses, the deal is certainly affordable. According to Finance Canada’s budget surplus estimates, there is $9 billion to work with from their so-called “contingency funds” and “economic prudence” reserves.  These reserves are a form of padding in the budget that enables the Liberals to generate large budget surpluses; they haven’t been used for “contingencies” for as long as the federal budget has been in surplus.

Should Canadians worry that spending a part of these reserves shaves too much off the government’s rainy-day reserves?  No.  Remember how the federal Liberals always low-ball their budget surplus estimates?  Just this month, four independent forecasters commissioned by the House of Commons Finance Committee gave their estimates of the upcoming budget surplus. Their average projected surplus for the next two years: $14 billion—meaning that this new spending can be paid for with $9 billion to spare!

There is no way that this deal represents the abandonment of fiscal probity. The federal budget can absorb $4.6 billion more in spending without coming anywhere close to a deficit.

Ironically, the ease with which the Liberals can fund these new spending measures confirms a practice of which the CCPA has been critical for years. Liberals have consistently concealed their true financial resources, only to make  “surprise” revelations of year-end budget surpluses.  Now that the Liberals are on the ropes, money is suddenly found for all of the priorities that they used to claim that they couldn’t afford.

Since we can surely afford it, what could be wrong with using the money to fund a number of popular social and environmental programs?

Some raise the spectre of Canada’s public debt.  They argue that the sizeable budget surplus that Ottawa has run for the last seven years has always been used to pay down the debt, and that if the government instead spends a portion of the surplus our the ability to pay down the debt will be weakened.

Even if this NDP/Liberal arrangement were to require spending the entire surplus for the upcoming two years, it would not pose a problem vis à vis our public debt. Keep in mind that our debt is low by international standards: measured in terms of the general government net financial liabilities, Canada has the lowest debt burden of all G-7 countries.

Moreover, the Finance Department admits that we will reach the Liberal government’s target of 25 % debt-to-GDP ratio even if nothing is paid down on the debt--through modest economic growth alone.  Paying down debt speeds up how fast we reach the target, but not by much.

So what is the problem? If the spending is affordable, and does nothing to jeopardize Canada’s standing in terms of its public debt, who could be troubled by this deal?

There will be some vocal disappointment from those businesses that were anticipating a corporate income tax cut—a tax cut that they themselves, along with surprised Canadians, did not expect in the lead-up to the Budget. The modified agreement between the Liberals and the NDP allows small and medium-sized businesses to keep the planned tax cut. 

In essence, the NDP request was for more spending now in return for a roll-back of future corporate income tax cuts--cuts that aren’t scheduled to go into effect until 2008 and beyond.  So claims that revoking these tax cuts will mean imminent peril for big business in Canada are, well, a bit rich. Canada’s tax rates are already competitive with those in the United States. Even when factoring in expected future U.S. tax cuts, Canadian average corporate tax rates would still be 1.4 percentage points lower than the U.S. rates by 2010. 

What is most commendable about this NDP/Liberal deal is that it has made the Liberals honour many of their own campaign promises.  After all, when they were campaigning the Liberals said not a word about corporate tax cuts, while making a big show about social programs and the environment.  This deal has made the Liberals deliver on some of what they promised, and helped them refrain from doing what they didn’t promise. Certainly this can only serve to enhance democratic accountability in Canada.

Ellen Russell is the CCPA's Senior Research Economist.