TAX NEWS - June 2010

Canada Tax: Harper's bank tax victory has left some scars

Ottawa's campaign against a global bank tax has stoked European resistance to Canada's deficit reduction idea

Stephen Harper can declare victory in his globe-trotting campaign against the bank tax, but reverberations from that triumph don't bode well for the wider ambitions of the G20.

The only thing the group that's supposed to co-ordinate global economic policies can seem to agree on these days is to go their separate ways.

Ottawa's campaign against a global bank tax has stoked European resistance to another Canadian idea: setting interim targets for reducing deficits that were piled up by governments combatting the global downturn,

There's an argument over whether to spend or cut, which pits the United States – which sees the need to continue spending – against the more austerity-minded Germany and Canada. Meanwhile, efforts to get G20 countries to make policy shifts to lessen huge imbalances in trade and financial flows are being resisted by China (which doesn't want to take part in the nitty-gritty part of that process). New fears, it seems, have not produced greater unity.

As a result of the fiscal crisis in Greece, many G20 countries fear a new wave of financial instability. Wary of that danger, Prime Minister Stephen Harper urged leaders to set out credible deficit-cutting plans to prevent fears of national-debt defaults. The International Monetary Fund, given the task by the G20 to analyze global economic problems, set out a long-term goal for countries: getting debt down to 60 per cent of the size of their economies by 2030.

Canadian officials have been pushing for the G20 to adopt interim deficit-cutting targets because that long-term target is too easy for governments to let slide. Canada has asked G20 countries to agree to halve their deficits by 2013, and reduce them to 2 or 3 per cent of their gross domestic product by 2020. It fits Mr. Harper's domestic budget plans, but other leaders might balk at targets that could come due while they're still in office.

One would think Europeans in the G20 would be the most receptive. They faced the Greek crisis, and many are talking about the need to cut deficits now, and for common euro-zone fiscal-policy rules.

But they have been the most resistant to Canada's proposal for common interim deficit targets, according to officials from several G20 countries. In meetings of G20 sherpas, they say they'll deal with deficit targets inside Europe. Other participants say it's a response to Canada's bank-tax opposition. "The Europeans quite easily say, 'Just like you said on the [bank tax] issue, you can do that if you want, but we don't need to,' " one official from a G20 country said.

The U.S. and European bank-tax backers had hoped to bypass the Toronto summit, and the host's opposition, and push it at the November summit in Seoul. Then Canada's campaign won support, and the bank tax was shelved at last weekend's meeting of finance ministers in South Korea. But the G20 didn't adopt it or kill it – they agreed to go their separate ways – Europe can do it within Europe, if it chooses.

That left scars that have affected talks on bigger economic issues, where there's already discord.

After agreeing to stimulus spending in 2008, the G20 can't agree on whether it should shift to cuts now – the timing of so-called "exit strategies." The United States thinks the danger is that slow economies could slip back into recession and wants continued spending. Others, such as Germany and Canada, worry that national-debt defaults could trigger a new crisis.

U.S. Treasury Secretary Timothy Geithner went to Germany two weeks ago to lobby for another year of spending. On Monday, German Chancellor Angela Merkel announced deep cuts instead. Britain's new government is signalling cuts in a June 22 "emergency budget."

The debate on when to start cuts appears to be over before the June summit begins; G20 countries are going their separate ways.

The pattern could set a precedent. Many in the G20 want China to spend more and increase the value of its currency. A low currency helps China export more and import less. The United States pressed the issue at a meeting of G20 officials in Calgary two weeks ago.

But China doesn't want to be the summit's focus, and doesn't want to shift its currency policy under international pressure. The G20 set up a process for issues such as China's currency values, and it's supposed to come in two phases: The IMF submits reports on economic forecasts and regional issues for G20 leaders to review in June, and a second phase will deal with national policy such as currency rates.

China is against the whole second phase. And they may be able to find lots of precedents for going their own way.