TAX NEWS - June 2010

Canada Tax: Short-sighted spending cuts to hurt Canada

Canada needs to avoid its past mistakes, such as chopping funding for education, when making efforts to slash its deficit, a new report said.

Provincial and federal governments have run up huge deficits to bolster the economic recovery paving the way for fiscal belt tightening down the line.

Finance Minister Jim Flaherty has already outlined a plan to rein in spending growth in an effort to trim Ottawa's deficit to just $1.8 billion by 2014-15.

Education funding was among the first categories on the chopping block the last time governments attacked their deficits, according to a report by the Institute for Competitiveness and Prosperity.

"We need to avoid repeating that mistake," the report said.

Economists have said the government will either have to curb spending growth to between 1% and 2% per year or raise taxes in order to balance the books within five years. Program spending currently tends to increase by about 6% per year.

But policy-makers, business leaders and citizens ought to remain focused on long-term prosperity as opposed to getting caught in the trap of short-term budget fixes, Tuesday's report warned.

Canada ranks fourth among countries with populations greater than 10 million when it comes to gross domestic product per capita and trailed the U.S. by 17% in 2009, it said.

To close the significant gap, Canada must continue its fight against protectionist measures south of the border, bolster trade negotiations with the European Union and pursue new opportunities in the emerging markets of China and India, said Roger Martin, the institute's chairman and dean of the Rotman School of Management at the University of Toronto.

In turn, increased exposure to international trade will fuel business innovation, the argument goes.

The report came down hard on the current government's approach to innovation for being too heavily weighted on science and not enough on consumer products.

"Without greater emphasis on true innovation, we will continue to spend billions of dollars funding invention and get little innovation to show for it," Martin said.

Recent changes to business taxes, on the other hand, are a step in the right direction and will spur investment, he said.

"At the federal level, we see the government committed to its planned reductions in corporate tax rates. And in Ontario and British Columbia the conversion of their provincial sales taxes to value added taxes harmonized with the federal goods and services tax is a tough sell politically — but it is the right thing to do."