Canadian Government’s decision to cut GST (tax) twice Essay

The Canadian government’s decision to cut the GST (tax) twice

GST is an acronym for the goods and services federal tax in Canada. It is a five percent tax that charged on goods and services that are sold for consumption in the domestic market. However, there are some specific goods and services which are exempted from this tax such as prescription drugs, exports and basic groceries. In the New Brunswick, Labrador, Nova Scotia and Newfoundland, the GST tax is combined with a provincial retail sales tax of eight percent and is referred to as the harmonized sales tax (Monroe). In the 2006, the Canadian federal budget proposed a reduction in the GST rate from 7% to 6% which was to be effective from the first of July 2006. A corresponding reduction of one percent was made to the rate of the Harmonized Sales Tax (AIS). The 2006 federal budget had pointed towards a further reduction in the GST rate to five percent in a future date. This second cut came to be formally announced in the Throne speech of 2007 (CTV.ca), was later confirmed on 30th of October 2007 during an economic statement by the Finance Minister. This second cut was to be effective from the 1st of January 2008 (CBC News).

The decision by the Harper government to cut the goods and services tax twice was arrived at in an elaborate policy process in the Canadian government which saw a shift in the fiscal policy to accommodate this tax cut. Canada is a federal state and its policy making process has to accommodate the views of both the federal and the provincial governments. The Canadian form of federalism has enhanced effective policy development and the legitimacy of the Canadian political system.

The fiscal policy making process

Central to understanding the influence of Canadian federalism on effective policy development, it is important to first of all understand the policy making process of Canada. Fiscal policy, under which the decision to cut the Canadian goods and services tax twice was based, refers to actions taken by the government to change the composition of their revenue sources and expenditures so as to influence the behavior of the economy. It starts with an annual budget in which the minister for finance prepares it and presents it to the government of Canada. The process of making the budget begins with a convention of the Cabinet around June where the elements for the next budget are considered based on the prevailing economic and political climate while taking into account the priorities of the government. This discussion is aimed at providing direction for the Central agencies as they prepare the budget. Central agencies constitute the Department of Finance, the Privy Council Office and the Treasury Board Secretariat. They work together with the departments using advice from the cabinet policy and parliamentary committees and the Treasury board to come up with a strategy and different options that will be used by the Finance Minister in the process of budget consultation. This process usually takes place from June to September (Armit).

The budget consultation process takes place from September to December. The Department of Finance, through the help of the Central agencies and other departments gets the Budget Consultation Papers ready. These are then released by the Minister of Finance who then consults with the Standing Committee on Finance, the general public as well as the stakeholders. The provincial finance ministers are also consulted during this time. Using the recommendations obtained from all these consultations, the Minister then comes up with a budget strategy which is presented to Cabinet for Review. However, the final decision on this matter is up to the prime minister and the Minister of Finance. After everything has been finalized, the Finance Minister then presents the budget speech and the Treasury Board president tables the Estimates. After this, the House of Commons deliberates on the budget, after which they vote either for or against it (Armit).

The 2006 federal budget that proposed the first reduction of the GST rate from 7% to 6% as well as a further one percent reduction at a later date underwent this budget making process. The budget announces the fiscal as well as economic targets of the government which are then subjected to a debate in the House of Commons. This budgetary proposal was approved and became entrenched in the fiscal policy of Canada, effective from the 1st of July 2006. This development set the stage for the Canadian government’s decision to cut the GST rate twice (Canadian encyclopedia).

In October of 2007, the Finance Minister John Flaherty tabled a motion which called for the second cut in GST and which also included proposals to cut personal and corporate taxes by $ 60 billion over the subsequent five year period (CBCNews). This mini- budget however, had to be presented to the House of Commons for approval in line with the fiscal policy making process. Even though the second GST cut had come under severe criticism from different corners including the opposition, they chose not to oppose the motion. The Liberal Party was in support of the personal and corporate tax cuts but opposed the reduction of GST. However, their decision not to oppose the decision of the government meant that the proposal of the Conservative party sailed through and the second GST policy was entrenched in the fiscal policy of the Harper government, effective from the 1st of January 2008 (Smith and Delacourt)

Responsibilities of the federal and provincial governments

 The fiscal policy making process is primarily the duty of the federal government. Even though it consults widely, the federal government is responsible for the budget preparation and consultation process, after which the decision of whether a proposal has been approved or not is left to the House of Commons through a democratic vote (The Canadian Encyclopedia). However, the provinces also have a role to play in the policy making process. During the budget consultation process that takes place from September to December, the provincial finance ministers are consulted in the development of the budget strategy and their advices are taken into account when the actual budget is being prepared (Armit).

Generally, the provincial governments of Canada are a part of the governmental system. Therefore, they have several jurisdictions under the Canadian constitution and its principle of federalism. Under the fiscal policy, direct taxation of the province residents is within the jurisdictions of the provincial governments besides playing a role in the budget consultation process (Makarenko). Thus in the Canadian government’s decision to cut the GST tax twice, the responsibility of the provincial governments was to play an advisory role in the budget consultation process and to implement the GST tax cut in their respective provinces. The GST cut had a corresponding reduction in the money transfers of the federal government to the provinces. It is worth noting that provincial governments can increase the rates of their sales tax in order to make up for the difference. Some provinces have reformed their taxes on retail sales to follow the federal GST more closely (Smart and Bird, 2).

Canadian federalism and its influence in the fiscal policy making process

Federalism refers to a structure of government in which powers are shared between an autonomous government and a semi autonomous government. Canada is governed by this system and the legislative powers are shared between the federal government and the provinces. The decision to divide powers between the federal government and the provinces was arrived at in 1867 and enshrined in the Constitution Act, sections 91 and 92. Under this act, the jurisdiction of the federal government was to preside over matters that affected the entire nation such as matters of the military, commerce and the promotion of economic growth. On other hand, the provinces were granted jurisdiction over local matters such as the health and education. When it comes to fiscal policy, the jurisdiction of the two levels of government is determined by the decentralization of revenues as well as government expenditures. There are particular programs which the provincial governments are in charge of and for this reason the federal government has to transfer money to the provinces. The economies of the provinces vary in their strength as well as their taxation capacities thus the federal government gives equalization payments to provinces which are relatively poor so as to help them give the services for which they are constitutionally responsible at reasonable and comparable taxation levels. The spending power of the federal government allows them to make decisions in areas under the jurisdiction of provinces (Aucoin). Due to the need for equalization payments, a new strategy has been adopted, referred to as collaborative federalism in which the federal government assists the provincial ones in achieving their objectives (Blindenbacher and Ostien, 14). The reduction in GST is seen as one of the steps to reduce fiscal imbalance and the collaborative federalism.

The main argument behind the fiscal imbalance concept is that at the prevailing tax rates (before the GST cuts), the federal government was earning more revenue than it needed to carry out its obligations whereas the provincial governments were not earning enough revenue to cater for their expenditures (Smart and Bird, 3). Consumption taxes such as the GST are the best way to earn revenue for public use. However, the cuts were proposed in order to address the much publicized fiscal imbalance which had created a need for the federal government to move huge amounts of money through intergovernmental transfers so as to fund the provincial expenditures. This system has served Canada for a significant period pf time but has been facing increasing criticism so in an effort to rebalance the fiscal structure of the federal government, the GST cut was proposed. The move is seen as a rationalization of the fiscal structure of Canada and a stimulus towards the development of a more rational consumption tax base which facilitates economic growth; rather than the federal governments earning revenue only for the provincial governments to spend it. Under the GST cut, the federal government will loose billions of shillings in revenue thereby reducing the dependence of the provincial governments on the federal government and enhancing their autonomy (Smart and Bird, 3-4).

An evaluation of whether or not the Canadian form of federalism impeded or enhanced the effective policy development and the legitimacy of the Canadian political system

At the moment, Canada operates under two levels of government; the federal level and the provincial one. The process of policy making in Canada is a mix of cooperation as well as competition among the various governments. They employ the use of jurisdictional, financial, bureaucratic and political powers to contribute to the development of policy over a wide variety of issues (Blindenbacher and Ostien, 12).

The provincial governments have always enjoyed a significant amount of autonomy in their policy formulation which is tailored to suit the local conditions of the different provinces. The relationship between the federal and provincial governments is based on partnership as well as equality as opposed to being a hierarchical system. As a result of the intergovernmental transfer of federal revenue to cater for the fiscal imbalance process however, the autonomy of the provincial governments was threatened as the provincial governments moved further from a competitive and semi autonomous kind of federalism to a more collaborative federalism (Blindenbacher & Ostien, 13). The issue of intergovernmental transfer has challenged the legitimacy of the Canadian political system and has been the source of intergovernmental conflict. For several decades, the Canadian equalization payments caused increasing discontent among the provinces such as Alberta which has continuously criticized equalization even as Quebec along with the Atlantic Provinces campaigned for higher payments. As from 2004 however, the mounting discontent over equalization payments turned into a full blown conflict when some provincial premiers openly challenged the decision of the federal government concerning the program, notable among them the Premier of NewFoundland who in 2007, placed an advertisement in the national newspaper denouncing the Harper government and in the same year, the then Saskatchewan premier threatened to sue the Harper government for failing in its constitutional responsibility. Later in 2008, the premier of Ontario challenged the federal government to end the equalization program, terming it as outdated (Lecours, 3).

 The aim of the equalization payment program was to fight inequality in development between regions without challenging the autonomy of the provinces. However, the opponents of equalization feel that such collaborative federalism is threatening the authenticity of the Canadian political system in that some regions were being favored at the expense of others and were benefiting more from the program at the expense of others. Thus the provinces combined and compiled pressure on the federal government to put a stop to the equalization program. The reason behind the political conflict involving this program is based on competition. The Canadian type of federalism involves competition among the provinces and the federal government therefore some provinces may fear that the equalization program will give some provinces undue advantage over others. The equalization program has thus become an integral part of Canadian politics (Lecours, 18). The decision by the Harper government to cut the GST tax twice has been viewed by some as a means of addressing the fiscal imbalance among the provinces and will reduce the dependence of the provinces on the federal government. If the provinces are encouraged to grow from their own fiscal capacity as opposed to looking to the federal government for transfers, then it is believed the legitimacy of the Canadian political system will be restored. Canada cannot claim to be a completely federal state if some provinces are being supported by the federal government while others are left to their own means. The collaborative type of federalism can therefore be termed as an “impediment” to the legitimacy of the Canadian political system which is competitive in nature (Lecours, 21).

The Canadian provinces have a major role to play in decision making and it is their activities that have influenced the equalization politics. The decisions of the federal government are based on the outcome of negotiations between the governments and this contributes to enhancing the national unit of the country, the growth of the economy as well as increased welfare. The results of the negotiation must cater to the interests of each of the provinces otherwise the federal government will be blamed (Lecours, 21). Collaborative federalism impedes the legitimacy of Canada’s political system but competitive federalism enhances it.

It is worth noting that the Canadian type of federalism may impede or enhance effective policy development. As an enhancement to policy development, this is because all the decisions made by the federal government have to be based on the views of the provincial governments otherwise they will lack legitimacy. This is an extremely important tool for development since it is based on a wide range of views which is taken into consideration as a policy is being formulated. However, the federal units do not really have a far reaching influence on the policy making decisions of the federal government and are limited only to an advisory role.

On the other hand, Canadian federalism can act as an impediment to effective policy development. This is because the provincial governments may mount undue pressure to the government to change a certain policy in a manner that works to their advantage.

The equalization program is an example of how Canadian provincial governments can impede effective policy making. It was started initially as a welfare enhancing fiscal policy, so that Canadians who were living in different provinces would not have to suffer because they lived in the poorer provinces. However, intergovernmental politics has overtaken the original aim of the policy to such an extent that different provinces chose to mount pressure on the government to get rid of it. Thus provinces which feel shortchanged, not only by the equalization program but other public policies as well can influence the federal government to get rid of a policy even when this policy can actually work to the benefit of the citizens of Canada. The federal government has found itself caught in the middle when provinces express their discontent with the manner a particular policy is being administered. In the equalization program for instance, the federal program had to make deals with some provinces that felt shortchanged by the equalization program so as to appease them. In 2004, it signed such a settlement agreement with Newfoundland and Nova Scotia dubbed the Offshore Accords. In 2008, the federal government also made a compensation agreement which saw Nova Scotia get $ 800 million for losing its claim to a Crown share in the offshore projects. However instead of suppressing discontent, this move actually created more dislike towards the program (Lecours, 20).

The impact of Canadian federalism as an impediment to effective policy development is not limited to the intergovernmental relations only but also to the internal policy formulation of the provincial governments. Canadian federalism makes it possible for the provincial governments to put the blame of any policies gone wrong in their jurisdictions on a detached federal government instead of taking responsibility for their actions. The fact that the responsibilities of the federal government and the provincial ones are not clear cut complicates the matter even more. As Blindenbacher and Ostien (14) points out, “who does what is never a fully settled issue.” Thus deficient provincial developments are routinely blamed on the federal government. Srinivasan and Wallack (489) point out that most subnational governments act as “organized interest groups” in national politics. For this reason, they can frustrate the efforts of the federal government even when they are not directly related to the policy making process.

Conclusion

Policy development in Canada is largely influenced by Canadian federalism. As the federal government comes up with a national policy, it must take into consideration the views of the provincial governments. Thus the Prime minister in whom the ultimate authority rests has to consult widely with the provincial Premiers as well as the territorial leaders before coming up with a national policy. Ideally, therefore, Canadian federalism can enhance effective policy development since it will accommodate diverse views. However, the effectiveness of provincial development is to a very large extent impeded by intergovernmental politics. Instead of focusing on the logic behind a particular policy, most provincial governments choose to engage in politics that will serve their interest vis-à-vis the interests of the federal government and other provincial governments.

Even among the politicians themselves, some policy decisions may be based on how popular it will be among the masses and how it will influence the masses in the different provinces. The decision by the Harper government to cut the GST rate was presented as a good economic policy which would solve the fiscal imbalance and help the provincial governments grow from their own capacity. However, it has also been criticized by others as being a political gimmick by the Conservative Party to earn political mileage. Policy making in Canada is therefore an uphill task which has to take several factors into play such as federalism and intergovernmental politics. Is Canadian federalism an impediment to effective policy development and a threat to the legitimacy of the Canadian political system? Not when Canada learns to separate politics from serious developmental issues.

References

AIS: 2006 Federal Budget Highlights. Aurora International Services. 2.4.2009 <http://www.aurorainternational.net/Budget2006.htm>

Armit, Amelita. An overview of the Canadian Budget Process. Presentation to a Roundtable on State Financial Control, Moscow Russia June 2005.

Aucoin, Peter. Decision- Making in Government: The role of program evaluation. Discussion Paper, March 29, 2005. Treasury Board of Canada Secretariat. 15.11.2005. 2.4.2009 <http://www.tbssct.gc.ca/eval/tools_outils/aucoin/aucoin_e.asp#2.1%20The%20Current%20Structure>

Blindenbacher, Raoul. Abigail J.Ostien, International Association of Centers for Federal Studies, Forum of Federations. Dialogues on distribution of powers and responsibilities in federal countries. Kingston, ON: McGill- Queen’s Press, 2005

CBC News. Government proposes $60B in tax cuts, with further GST drop.. 2.4.2009 <http://www.cbc.ca/money/story/2007/10/30/econstatement.html>

CTV News. Throne Speech promises GST cut, Afghan vote. CTV.ca. 2.4.2009 <http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20071016/throne_speech_071016/20071016?hub=TopStories>

Lecours, Andre. Federalism and Fiscal policy: The Politics of Equalization in Canada. 2.4.2009 <http://politicalscience.concordia.ca/news/documents/LecoursEqualizationfinal2009.pdf>

Makarenko, Jay. Provincial Government in Canada: Organization, Institutions & Issues. Mapleafweb. 4.3.2009, 2.4.2009 <http://www.mapleleafweb.com/features/provincial-government-canada-organization-institutions-issues>

Monroe, Susan. Goods and services tax- GST. About.com: Canada Online. 2.4.2009 <http://canadaonline.about.com/od/personalfinance/g/gst.htm>

Smart, Michael and Richard M. Bird. The GST Cut and Fiscal Imbalance. International Tax Program Paper 0604 June 2006.

Smith, Bruce Campion and Susan Delacourt. Liberals wont force election on economic plan, Dion says. Toronto Star 31 Oct 2007. Retrieved from pressDisplay.com. 2.4.2009 <http://portal.sre.gob.mx/canada/pdf/dion31.pdf>

Srinivasan, T.N and Jessica Seddon Wallack. Federalism and Economic Reform: International Perspectives. West Nyack, NY: Cambridge University Press, 2006.

The Canadian Encyclopedia. Fiscal Policy. 2.4.2009 <http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=a1ARTA0002823>