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Predicting the 2014 Budget (Based on Ottawa's Hints)

10/31/2013 05:35 EDT | Updated 01/23/2014 06:58 EST

Fiscal policy is really about taxes and spending and the federal government recently provided some hints on its plans in these areas.

In the recent Speech from the Throne, the government reaffirmed its commitment to balancing the budget by 2015-16 and providing "greater tax relief for Canadian families" after the budget is balanced. But what form this tax relief may take remains a mystery.

There was no mention of income splitting for families or its other 2011 platform promises. Does this omission mean the government left the door ajar for major personal income tax reform? If so this would be a major step in a new, pro-growth policy agenda.

To achieve the target of eliminating the deficit by 2015-16, the government announced new commitments that are intended to restrain the growth of spending. This is perhaps partly in recognition of the slow economic growth environment and the fact that robust revenue growth cannot be counted on as the sole basis for returning to balance.

Specifically, the government has promised to freeze the departmental operating budgets, reduce the generosity of public service benefit plans, and enact balanced budget legislation. Of course, the devil will be in the details and we look forward to seeing them unveiled. At least next month's Economic and Fiscal Update should give Canadians a better sense of whether the government is truly on track to deliver on this deficit elimination promise.

As for taxation, the government signaled that tax relief for families will be its top, post-deficit priority. This type of language is bound to start a public debate about how the government ought to use the new fiscal room and what form any future tax relief should take. The last time the federal government was set to eliminate the deficit was in the 1990s and there was considerable debate on how to prioritize future budgetary surpluses. This ultimately led to major personal and corporate tax reductions in 2000 and helped to maintain a period of strong economic growth.

The current government has previously made a handful of tax-related promises that are conditional on eliminating the deficit. The most significant promise is to bring in income splitting for families with children. It has also committed to introduce new or augment existing tax credits for fitness and other activities. The problem with these tax proposals is that neither is broad-based and additional tax credits will add complexity to the system with minimal contributions to higher economic growth and improved living standards.

There is a better way to move forward.

Previous federal tax reforms have made important progress on improving Canada's business tax regime, but one area of taxation where we remain decidedly uncompetitive is on personal income tax rates and the income levels at which they apply.

To set the foundation for strong future economic growth, and to attract skilled workers, entrepreneurs, and investment, Canadian governments -- both federal and provincial -- must consider fundamental personal tax reform. That means broadening their tax base by eliminating ineffective tax credits, deductions, and other special privileges, and flattening their tax rates. The federal government has an opportunity to be a leader on tax reform that would have a dynamic effect and contribute to higher economic growth and improved living standards for average Canadians.

Hopefully the ambiguous language in the Throne Speech about tax relief signals the government is open to substituting its past tax relief promises with more fundamental personal income tax reform.

Broad-based tax reform would provide considerable "tax relief" to Canadian families regardless of family circumstances or individual priorities. It would encourage productive economic activity like increased work effort, saving, investment, and entrepreneurship. It would also reduce the complexity of the tax system so families can spend less time and money filling out their taxes and more time on the things that matter.

Tax reform requires political leadership. Special interests have fought to secure their tax preferences and will resist any changes to them. But if the goal is greater tax relief for Canadian families and higher economic growth for all Canadians, then tax reform should be the federal government's top post-deficit priority.

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