Personally, I’ve never found completing my taxes particularly onerous. It takes me a few hours — no big deal. I’m paid well (and well above the average). I’ve never had to hire an accountant, as I’m not doing anything fancy. I’m only availing myself of a few basic deductions — RRSPs, the child care deduction, and charitable deductions.

But when I’m done, I like to do the following exercise: first, I go back and look at my total income (not my “net” or “taxable” income, but rather my gross income). Then I look at what I actually have to pay in total federal and provincial income taxes (not what was deducted from my paycheque, but rather what I will actually have to pay after all my deductions and my tax refund). Then, using these two figures, I calculate the total effective income tax rate I pay.

And what do you think that is? Go ahead, take a guess… 20%? 25%? 30%? More? Alright, I’ll tell you — 13.38%! And all I can think is “What a #?!@#*?&@#!!  steal!” Here I am making roughly two and a half times the median income, and I’m getting all these public services, and I’m only paying 13.38%! In fact, if I isolate only my provincial income taxes, the total effective income tax rate comes to a paltry 3.46%. Ridiculous. What are these tax cutting maniacs complaining about?

Now granted, we pay other taxes too: payroll, sales, property, MSP, etc. When these get included, the tax regime ends up a whole lot less progressive, and the total bill increases. But, as the CCPA’s Marc Lee found in a major 2007 study entitled Eroding Tax Fairness, even when these all these taxes are included, most people are paying closer to 35% of their income in total taxes, and no income group is paying more than 40% (indeed, the very wealthy pay a lower overall rate than the poor and middle class). So why are so many people under the mistaken impression that they are paying over 50% of their income in taxes? Well, because they are told this so relentlessly in the mainstream media. But they aren’t.

I encourage people to do the same exercise I did when they complete their taxes. The results will surprise you. And when you stand back and look at what we pay in taxes, set against the public goods and services we provide to one another in exchange, one is hard-pressed not to conclude that it’s a pretty great deal. In fact, maybe it’s time to increase our taxes.

When the global recession hit in late 2008, economic output and employment fell so steeply in such a short period of time that policy-makers were seriously concerned about the possibility of the downturn growing into a global depression. The sense of urgency led to unprecedented levels of multilateral economic coordination, with stimulus spending rolled out worldwide and significant deficits incurred by nearly all governments.

A year and a half later, we seem to have dodged the bullet of a global depression. Many will agree that what likely saved us is the coordinated global stimulus packages. Others, however, argue that it was all much ado about nothing and the global economy would have bounced back without government spending. Who’s right?

It’s easy to write off the concerns about a deep and prolonged recession once the recovery has began. Unfortunately (or fortunately?), we cannot observe what the global economy would look like in the absence of the massive inflows of government spending, so this debate will not be resolved empirically.

It seems very likely that the governments’ willingness to step in and do what it takes to avert a potential disaster played an important role in boosting business and investor confidence. Without confidence about the future, and without much eased credit conditions and record low interest rate, business investment could have dried up for much longer. Business “investment intentions for 2010 remain modest and largely driven by the public sector,” observed Mark Carney (the governor of the Bank of Canada) in a speech to the Ottawa Economics Association on March 24. Yet, the role of stimulus spending on consumer and business confidence cannot be measured.

Other stimulus impacts are measurable and they provide strong evidence that the stimulus worked, both globally and in Canada. Institutional and government construction remained a beacon of light for the construction industry when commercial and residential construction plans were put on hold during the recession. In addition, the role of the public sector in keeping employment levels afloat cannot be denied. Most of the job creation that we’ve seen over the past six months comes from public sector employment, while the private sector is still shedding jobs. The automatic stabilizers of employment insurance and welfare helped stabilize household incomes to some extent, although they could have done a lot better if it was easier to qualify for these programs.

The federal stimulus package was far from perfect. As we’ve argued on this blog previously, the stimulus would have had a larger impact if it was bigger, less focused on tax cuts, and better targeted to projects with long-term payoffs for the country (think green infrastructure, universal early child care and education programs and poverty reduction initiatives). But without the stimulus, Canadians would have been a lot worse off.

The report earned the scorn of Federal Finance Minister Jim Flaherty, who called it ”poorly done and it’s wrong” in the Vancouver Sun.  His overall assessment?

“You know I just — I’m disappointed that the [Fraser Institute's] work is as shabby as it is.”

Let’s take a closer look at the actual report and examine the claims made and the statistical evidence used to back them up.

To come to the conclusion that “government investment did not contribute to the turnaround during this period [the second half of 2009],” the Fraser Institute researchers engage in a simple growth accounting exercise, breaking down the change of GDP growth in the last two quarters into its four components. Every first year macroeconomics student would be familiar with the growth accounting equation:

GDP = G + I + C + (X-M)

In plain English (for the non-economist readers), this translates to:

Total economic output = Government spending (or consumption) + Investment (both government and business) + Private consumption + Net exports (the total value of all exports minus the total value of all imports)

Statistics Canada measures and reports on each of these four components on a monthly basis, and it also compiles the data into quarterly and annual reports. The Fraser Institute researchers looked at the numbers for the last three quarters of 2009 and found that government spending and investment played a relatively small role in Canada’s economic recovery so far.

On the surface, this seems to make sense – Canada is a small open economy and global conditions (such as commodity prices and demand for our exports) drive our economic fortunes to a large extent. Global forces started the recession and we cannot sustain a strong domestic recovery without an improvement in the global economic conditions.

In fact, I agree with the Fraser Institute’s assessment that the government cannot claim exclusive credit for the speed of the recovery, just like it cannot be blamed for the recession in the first place. Along those same lines, we should acknowledge that the BC boom in the late 2000s was driven by high commodity prices and growing demand for our exports, rather than by the changes in domestic tax rates or the government’s economic management (although you won’t hear the Fraser Institute staff make this argument).

However, while the government did not single-handedly drive the recovery, they can and should claim credit for cushioning the blow of the recession. Both the federal and provincial governments stabilized employment and personal incomes (and thus consumer spending) by maintaining operating expenditure levels despite the reduction in their revenues. The federal stimulus package was arguably too small to make a very big dent and there were delays in rolling out the actual spending, but without it things would have been a lot worse. Note, for example, that almost all of the recent gains in employment have come from the public sector, while the private sector continued to shed jobs in February, according to Statistics Canada’s latest release from the Labour Force Survey. How much higher would unemployment rates have climbed if the government listened to the Fraser Institute’s advice to balance their budgets by cutting spending?

Government spending filled part of the gap opened by the decline in business investment and private consumption during the recession. With public spending at less than a third of Canadian GDP, the government cannot be expected to fully offset the drop in business investment or private consumption. Their job is to smooth out economic fluctuations by spending counter-cyclically and this is precisely what they did this time. The Fraser Institute researchers do not find evidence of that because they do not look. They focus their attention exclusively on the last two quarters of 2009, when recovery is starting to take hold.

There are a number problems with their analysis.

1) They misuse the growth accounting equation to derive conclusions that are beyond the scope of the equation. All the growth accounting equation tells us is how individual GDP components changed each period (i.e. did they rise or fall), it does not tell us why.

2) They assume that contemporaneous correlation equals causation (and this one is a classic concern in social sciences). The Fraser Institute reports looks at what variables change between two quarters and argue that these must be causing the observed change in GDP growth. This simplistic analysis neglects indirect effects that the stimulus spending may have had on consumer and business confidence, for example. The report authors also fail to account for a number of other government interventions which could conceivably explain some of the GDP growth, such as the swift monetary response from the Bank of Canada, which lowered interest rates and eased credit conditions undoubtedly contributed to improving the climate for private investment.

3) Two quarterly observations do not provide sufficient data to derive meaningful conclusions about the drivers of economic growth in BC, particularly so when the numbers fluctuate so widely from quarter to quarter (compare figure 2 and figure 3 in their report).

Business investment contributed 1.0 percentage points to GDP growth between the 2nd and 3rd quarter, but -0.6 percentage points between the 3rd and the 4th quarter, offsetting the previous quarter’s gains by more than half. Similarly, net exports were a drag to the economy in the 3rd quarter but a boost in the 4th. Which way these numbers will go next quarter only time can tell.

Looking at annual data provides very different conclusions. Statistics Canada reports:

Real GDP fell 2.6% in 2009, as exports dropped 14% and business investment in plant and equipment fell 17%.

and later on:

Final domestic demand recorded a 1.7% decline, largely due to a 17% drop in business investment in plant and equipment. Consumer spending edged up, as a result of a 1.1% increase in expenditures on services. Consumer spending on durable and semi-durable goods declined 2.8% and 2.9% respectively. Government current expenditure on goods and services grew 3.0%, and government capital expenditure increased 13%. [empasis added]

It’s clear from the annual data that without the government stimulus spending, the economic decline in 2009 would have been far greater. It’s quite possible that government stimulus spending provided the necessary conditions for increased private sector spending, thus indirectly driving economic growth. For example, both the federal and provincial governments made it very clear that they are prepared to step in and avert the worst consequences of the recession even at the cost of budget deficits. This certainly helped restore business and investor confidence and opened the door for private sector investments that may not have been undertaken otherwise.

The Fraser Institute report finds that net exports were the main economic driver in Canada during the 4th quarter of 2009. Unfortunately, this wasn’t the result of a strong rebound in our export sector – exports continue to suffer from the high Canadian dollar – but of “a slowdown in the growth of imports of goods and services.” Lower imports means weaker domestic demand. This is hardly the foundation for a strong private sector recovery brewing.

Indeed, it’s too early to conclude that the private sector would be able to take off on its own should the stimulus be withdrawn. We need to be very careful about scaling back public spending next year to avoid slipping back into a recession.

These cuts have been devastating to many service delivery agencies and will result in the cancellation of programs that benefit the least fortunate in our society: children growing up in low income families, women at risk of violence, the poor. In a recent news release, the CCPA has called for the government to repeal all the cuts made since the February budget.

Make no mistake: these cuts are made because our provincial government wants to end up with a smaller deficit at the end of the fiscal year, not because we cannot afford to help vulnerable groups during a serious recession. Despite the recession, BC is one of the wealthiest provinces in this country. Our provincial debt is relatively low. We certainly have the capacity to cushion the blow of the economic downturn to the more vulnerable individuals and families among us. But our government is choosing not to.

In fact, in their obsession with minimizing the size of the deficit, our policy-makers are pushing people into further hardship. And those who have to endure the pain are those who can least afford it. Kudos to Bill Good for recognizing this simple fact on his CKNW show this morning.

The savings from reduced government grants to social service agencies are $354 million, a mere 0.9% of the overall $40 billion provincial budget for 2009/10. These cuts could easily have been accommodated in only a slightly higher deficit.

The recession is temporary, and so are the current deficits, but the lost educational opportunities for children would never be recovered. It’s penny wise but pound foolish to cut funding to programs that have already been pared to the bone and that provide services with long-term payoffs.

The government is trying to create the impression that cuts are concentrated among “nice to have” but non-essential programs. This is simply not the case. Many of the initiatives that are now being cut have been set up to fill a need that exists because the government is not providing adequate social services and supports out of its core budget. Literacy initiatives, supports for violence against women and children or seniors’ activity programs that keep people healthy and out of hospitals should not be left to the whim of discretionary grants funding. We need to ask ourselves questions such as whether we prefer to pay for programs that enrich the lives of disadvantaged children as they grow up, or for policing and anti-gang measures a few years in the future.

The secrecy with which these cuts have been implemented is also egregious. Without knowing exactly what is being cut, we cannot evaluate the impact of the cuts, and without openness and transparency it is simply not possible to have an honest public debate about priorities. This is why we’ve launched our own effort to track the cuts and we are asking affected groups or individuals to come forward and share their stories.

From a purely macroeconomic standpoint, any government spending is better than none in the midst of a recession as it will boost the economy in the short term. In the long term, however, the best use of government borrowing is to finance investments that will bridge our current economic needs with long-term social and environmental goals. Think investments that leave us with healthier and better educated citizens, that increase long-term productivity and set us up for the “green” economy of the future, while also increasing the quality of life for all people.

It’s here where the current government policy leaves a lot to be desired. We would be better off running higher deficits and making these public investments now, than running smaller deficits and having to pay them off with a less productive economy in the future. Let’s not forget that public dollars can be invested in initiatives that will have long-lasting benefits for said future generations.

According to a new study by UBC’s Human Early Learning Partnership, just under 30% of BC children entering kindergarten are “developmentally vulnerable” (read, not ready to learn), and the resulting depletion of human capital is estimated to cause BC to forgo about 20% of GDP growth over the next 60 years, a value equivalent to investing $401.5 billion today at a rate of 3.5% interest (for more details, see this Vancouver Sun article).

By failing to make public investments now to eliminate child poverty and ensure that our children grow up healthy and have access to good quality education, we are wasting our children’s potential and leaving them with a less productive economy in the future. Yes, making these investments will cost money and increase the government debt, but at this point leaving debt to our children seems far preferable to the alternative of saddling them with the (often very expensive) consequences of our unresolved social and environmental problems.

There is, however, a type of debt that we should not leave to future generations. It’s the debt incurred from hosting lavish parties for ourselves (Olympics, anyone?) or creating wealth by destroying the environment (through subsidizing natural gas extraction, for example).

Increasing government debt in itself is not as large a problem as some of the recent media coverage would suggest, but both BC and Canada’s governments could and should be making better spending choices.

A new report by yours truly, released today by the CCPA, examines the social and economic costs of spending cuts and concludes that in these hard economic times, spending cuts will create far more problems than they solve. This is because government spending has ripple effects throughout the economy, causing a change in output (GDP) that is greater than the actual cut. For the economy as a whole, less money floating around means higher unemployment and lower aggregate income – a drag on the economy at exactly the wrong time. For BC families, spending cuts mean reduced access to public services like libraries, seniors’ care and community health services and reduced supports for the most vulnerable among us. It means that thousands of people would lose their jobs and that’s on top of the recession-driven losses we are going to continue to see for months or even years. Many would be forced into poverty and homelessness.

But it doesn’t have to be that way. British Columbians have been trained to think that government debt is bad and should be avoided at all costs. We continue to be bombarded with dire warnings about the supposed negative effects of running a deficit. Yet, the truth is that it is entirely appropriate for the government to run a large deficit in a serious recession.

At the bare minimum, the deficit needs to be high enough to cover revenue shortfalls arising as a direct result from the recession (the underlying deficit). How big that is would depend on how poorly the provincial economy performs, but our models point to an underlying deficit in the range of $3.2 to $3.9 billion for 2009/10 alone.

The best response to a major recession would go beyond funding the underlying deficit and introduce new spending measures to stimulate the economy and protect incomes and employment.

What British Columbians need from their government in next week’s budget is not a plan to minimize the deficit but bold leadership and a stimulus package that keeps the economy rolling in a way that moves us closer to our social and environmental objectives.

Let me set the record straight: temporary, recession-driven deficits do not threaten the longer-term health of provincial finances.

The deficit that the province now faces is a direct result of the recession; it’s what economists call a cyclical deficit. As economic conditions deteriorate, lower personal incomes and business profits lower tax revenues, while government spending increases to meet the growing need for welfare and other transfers to low-income people, creating a budget deficit. However, these deficits will all but disappear when BC recovers from the recession as tax revenues grow (boosted by higher incomes and profits), while spending on social supports declines (as fewer people need them).

Yes, the government should live within its means over the long term, but there is absolutely no reason to do so every single year. In fact, when “living within its means” requires cutting spending on important programs and services during a recession, it is not just unnecessary but downright harmful. It penalizes the families most affected by the recession, who will have fewer supports to rely on, and it takes money out of the economy precisely at the wrong time.

With the second lowest debt-to-GDP ratio among Canadian provinces, BC is in a good position to run even large deficits over the next few years. The unacceptably high child poverty rate in BC presents a far bigger danger to our children and grandchildren than several years of cyclical deficits ever could.