Tax Freedom Day has finally arrived. In 2010, Canadians start working for themselves on Saturday June 5th. In other words, if we had to pay our taxes up front, we would have to pay each and every dollar we earned from January 1 to June 4 to various levels of governments. This of course translates into an awful lot of money. In fact, the average Canadian family with two or more individuals will pay about $39,000 in taxes in 2010.
So now that we’re working for ourselves, rather than government, it’s time to celebrate, right? But this year Canadians might want to keep the champagne on ice.
In their efforts to stimulate the economy, the federal government and all 10 provincial governments are running significant budget deficits. These deficits, of course, must one day be paid for through taxes, meaning that if government spending is not reduced, higher taxes are on the horizon.
Start with the federal government, which has budgeted for a $49 billion deficit this year. Couple that with the $53.8 billion deficit they ran last year, and the fact that they expect to be in the red for four more years, and the deficits total $158.4 billion over six years.
Of course temporary deficits can be expected during a recession when revenues decline and spending on certain social programs such as Employment Insurance automatically increase. But that’s not what’s driving the federal deficits.
The Canadian economy is no longer in recession and is well on the road to recovery. The turnaround started in the middle of 2009 and the economy has grown for three consecutive quarters. In addition, the Bank of Canada and major private sector banks are forecasting positive economic growth for Canada and all the provinces in 2010.
This positive economic news is reflected in the revenue projections contained in the federal and provincial budgets. All Canadian governments, with the exception of Saskatchewan, are expecting an increase in government revenue this year (2010/11). In fact, most Canadian governments are expecting 2010/11 revenues to either meet or exceed their 2008/09 level.
So as revenues rebound, governments are running deficits simply because of large spending increases. For example, if the federal government delivers on its budget plan, spending will have increased by an astonishing 17.5 per cent in just two years (2008/09 to 2010/11).
If Canadian governments actually had to cover current expenditures with current tax revenues and were not able to defer the tax burden with deficits, Tax Freedom Day would be significantly later in 2010. In fact, it would fall 25 days later, on June 30. Of the 25 additional days, 15 are due to the federal deficit and the remainder to provincial deficits.
Our politicians of course claim that deficits are necessary to help stimulate, or kick-start, the economy through increased government spending. But as a recent Fraser Institute study, Did Government Stimulus Fuel Economic Growth in Canada? An Analysis of Statistics Canada Data, shows, government stimulus had virtually no impact on last year’s economic turnaround. This is really not surprising given the vast body of academic literature that has found government stimulus spending does not boost economic activity.
The solution to the quick elimination of deficits is therefore simple. Government spending should be cut. Waiting five or more years to eliminate deficits will only burden Canadians with more wasteful government spending, higher government debt, increased interest payments, and a much later Tax Freedom Day in the future.
On that note, enjoy Tax Freedom Day. Next year you may be waiting even longer.