After putting their fiscal houses on a sustainable footing, Canada’s federal and provincial governments appear to be struggling to develop a new vision of where they would like to lead the country, say TD economists in their latest issue of TD Report on Canadian Government Finances.

“The fact is that the overall fiscal health of Canadian governments is the soundest it has been in several decades, but governments are not seizing the moment,” said Don Drummond, senior vice president and chief economist at TD Bank Financial Group.

While the United States and other G-7 countries are currently mired in growing deficits and mounting debt, Canada’s combined federal- provincial budget surplus is expected to reach $27 billion by fiscal 2007-08. “As the debt burdens decline, governments are able to reallocate savings on debt-service costs to other areas, including increased spending and tax cuts,” noted Drummond.

TD’s five year projections do not build in the federal-provincial Health Accord reached on February 5, which will set the stage for $23 billion in additional federal transfers to the provinces by fiscal 2007-08. “To the extent that these new funds are spent incrementally on health care, there will be no impact on our ‘status quo’ provincial budget balances,” said Drummond. “But there is the possibility that funding may be applied by the provincial governments toward addressing other priorities, such as debt reduction, other spending pressures or tax cuts.”

TD Economists contrast the current signals transmitted in recent budgets and updates to those of the past. “Governments have traditionally had a clear focus — whether it was the program-building era of the 1950s-1980s, deficit cutting of the mid-1990s, or tax cutting of the late 1990s,” said Drummond. “But, today, it is difficult to get a lead on where they’re steering the ship.” He points to the federal government’s 2002 Speech from the Throne, which identified 20-odd areas of ‘high priority’, without any clear indication of how all of these themes will tie together.

After taking centre stage during the late 1990s, the tax-cutting agenda has largely waned from the public profile, despite the fact that there is unfinished business to lower the overall tax burden to a level where it will not create a roadblock for economic growth. Drummond noted, “Even if pressures to balance the books and to reinvest in areas such as health preclude large- scale tax cuts in the near term, then governments can still implement changes to their respective tax structures in order to improve tax competitiveness.” He proposes shifting from a reliance on income, savings and capital taxes to those levied on consumption.

To round out the picture, Drummond recommends that governments use this additional flexibility to then shape a vision that can be communicated, that builds for the future, and around which Canadians can rally.