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Keeping Canada Away From the Fiscal Cliff

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When Canada's annual budget deficit came in bigger than expected at $26.2 billion recently, the news didn't spark a sell-off in the markets or an emergency debate in parliament. But that doesn't mean Canadians should be complacent about balancing the budget.

When Ben Bernanke, the chairman of the United States Federal Reserve is nervously warning Congress that they face "a massive fiscal cliff of large spending cuts and tax increases" this coming January 1, while Canadians shouldn't confuse what's going on south of the border with Ottawa's dilemma, the need for more cuts in Canada is certainly real.

The Harper government has taken some heat from the opposition for making so-called spending cuts. The truth is that spending has risen every year since the Conservatives took office, rising 30 per cent over the past six years. And Finance Minister Jim Flaherty, in his spring budget, forecast that number to rise to 42 per cent by time the next election rolls around in the spring of 2015.

At $26.2 billion, Canada's deficit last year was a noticeable improvement from $33.9 billion in 2010 and the record shortfall of $55.6 billion in 2009. All told, four consecutive deficits have pushed up our federal debt by $124.5 billion, and Flaherty expects the accumulation of red ink to reach $157.1 billion before the next election.

All that new debt makes it tougher for Ottawa to pay for things that people want. Interest payments on the federal debt reached $31 billion last year, more than the entire combined budgets for unemployment benefits, maternity and parental benefits, the child tax credit, and the universal child care benefit.

Unbelievably, that's with the lowest interest rates in 50 years. What would happen if interest rates went up a percentage point or two? Multiply our federal debt, soon to be $600 billion, by one per cent, and you get $6 billion in additional interest costs. Multiply by two per cent, you get $12 billion. That's more than the entire provincial budget of Saskatchewan.

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To be sure, the Americans have bigger problems: for every dollar the Canadian government spent last year, it collected over 90 cents in tax revenue. For every dollar the U.S. government spent, it brought in just 70 cents, up from 57 cents a year earlier. And while we've added $124.5 billion to our federal debt over the last four years, U.S. federal debt has jumped by $6.1 trillion -- you read that number correctly -- the U.S. government has borrowed 50 times as much money as Canada's government has borrowed over the past four years.

American and European politicians are learning, again, the hard way, that you can't spend your way out of an economic downturn and you can't borrow your way to prosperity.

Here in Canada, the Harper government is trying a bit too gradually to tighten the spending tap, in hopes that a growing economy will bring enough new money into the treasury to balance the books by 2015.

Fortunately, arrows are moving in the right direction.

After plunging $12 billion to $103.9 billion in the wake of the financial meltdown in 2010, Canada's federal income tax revenue reached a new record high of $119.3 billion last year, without any rate hike. Federal income tax revenue from business rose $1.7 billion to $31.7 billion last year, after Flaherty cut rates from 18 to 16.5 per cent, and then again to 15 per cent, proving that lower tax rates can help boost business activity. Not only did businesses pay more income tax, but the government saved $2.2 billion, paying out fewer unemployment insurance benefits as more Canadians found jobs.

As taxpayers, we need to keep our politicians focused controlling costs, keeping taxes affordable, and balancing budgets -- the straight and narrow path that leads us far away from the fiscal cliff.