If government revenue is cut by 8%, how can it grow by 5%? Gordon Campbell's answer to that question was "tax cuts pay for themselves". We now know that isn't true, but that is the slight of hand that is used in Stephen Harper's election platform. His platform cuts income taxes more than 15%. Income taxes make up 47% of revenue, but Harper assumes that total revenue will go up by 5% per year despite the cut. Those who think a cut will give you more should try taking a long walk off a short pier.

The Conservative platform released on June 5th claims the cost of the tax cuts will be $11.2 billion by fiscal 2008-09 plus $3.5 billion for a new child tax deduction. Harper also promised more spending on the military and health care so money must be found to cover those costs plus the lost revenue. In BC we have had a painful experience with failed tax cuts. How would the budget be balanced after Harper's tax cuts?

The Conservative platform contains a forecast of revenue and expenditure to fiscal year 2008-09, starting with the base of fiscal year 2002-03. This permits a comparison with part of the last Liberal budget. The revenue numbers from 2002-03 through 2004-05 match what is found in table 3.3 of the last budget. Harper's expenditure numbers are $3.8 billion less in fiscal 2003-04 (the year already completed), $5.4 billion less in fiscal 2004-05, and $7.7 billion less in fiscal 2005-06. Harper explains away the spending cuts by saying that they are covered by more honest budgeting. That is another way of saying he eliminates the contingency reserve and the $1 billion allowance for "economic prudence". He may find that on total revenues of almost $200 billion, a 1% variation (bad luck) makes $2 billion disappear. A little prudence is necessary if the budget is going to finish the year as balanced as when it is nothing but a plan.

(As a technical note for 2002-03, both the Conservative platform and the last Liberal budget show both revenue and program spending as $12.6 billion less than what is shown in the public accounts. That is because of a difference between "budgetary revenues" and total revenue as defined in the public accounts.)

The big changes in the Conservative platform don't kick in until 2008-2009. There are no comparable figures from the last Liberal budget for that year. That is when the tax cut would be fully implemented with the consequence of $14.7 billion in lost revenue. Nevertheless, Harper assumes that total revenue will grow by 15% in the three years between fiscal 2005-06 and 2008-09. Assuming that tax revenues will show high growth rates at the same time that tax rates are cut is the same mistake made by Gordon Campbell. Real economies don't work that way. The challenge for Harper is to explain what will happen to his plan if revenue doesn't grow when tax rates are cut. With the elimination of contingency funds, what will be cut to balance the budget. Harper did learn one thing from Campbell's mistakes. He put off the biggest part of his tax cut until the year he would go to the polls again.

The last fiscal year for which audited financial statements are available is 2002-03. It is useful to review the statement of revenues and expenses in order to put any party's promises in perspective. As much as the Liberals need to be held to account for waste and corruption, no one should think that eliminating the Liberal mistakes would be enough to come anywhere close to paying for the promises. Whether you cost the gun registry, the HRDC boondoggle and the sponsorship scandal at $1 billion, $2 billion or even $3 billion, that is a very long way from covering $15 billion per year less in revenue. In BC Campbell's tax cuts were paid for by increasing regressive taxes like MSP premiums and the sales tax and by cutting services in justice, social services, the economic ministries and even in protection for abused children. What federal services would be cut to pay for Harper's promises, if like Campbell, he discovers that revenue growth doesn't match his forecast?

It is useful to begin with an understanding of where the federal government gets its money, and where it is spent. The public accounts for 2002-2003 show the following revenue sources:

The public accounts for 2002-2003 show the following expenses:

Debt servicing costs of $37.3 billion show the importance of balancing the budget. Jack Layton and Paul Martin have both promised to do that; the Conservative position is unclear if revenue growth doesn't materialize. It is not possible to offset lost revenue against debt servicing because the creditors must be paid. With respect to the balance of government spending, just over two thirds is for transfers to people (OAS, GIS) and other levels of government (health transfers, equalization). All of what some people may think of as the bureaucracy totals $47.2 billion, but that includes the entire national defense budget, the federal prisons, and the tax collectors, to name a few. In other words, as much as some may claim there is fat in that portion of the budget, there is also a lot of bone that various parties have promised to increase. It would be impossible to cut over one third of the program budgets without doing serious harm. Harper has some explaining to do. Before we get faced with another example of what happened in BC, he needs to say how he will balance his budgets.