(September 6 – 11:40 ET) – Canada’s federal and provincial governments have eliminated their budget deficits, have begun to reduce tax rates, and are in the process of transforming themselves from financial burdens into engines of economic growth, say TD economists.

“The job is far from complete, but the change thus far has been material and there is tremendous potential for continued progress,” says Derek Burleton, senior economist at TD Bank Financial Group.

TD lauds the federal government and eight of the provincial governments for the expected combined budget surplus of about $15 billion in fiscal 2000-01. TD calls this a stunning turnaround from the $66 billion deficit recorded eight years ago. “Strong economic growth and low interest rates have set the stage for this dramatic elimination of the combined government deficit, but governments also deserve credit, for making difficult but necessary organizational changes and spending cutbacks,” notes Burleton.

But the bank says the elimination of budget deficits is only a crucial first step in reducing Canada’s mountain of government debt. This latter task remains in the early stages, however. The bank notes that the current debt-to-GDP ratio of 79% “remains far outside of any reasonable comfort zone.”

TD says decisions about the appropriate pace of debt reduction are made more difficult by the importance of cutting taxes immediately. “Personal income tax cuts are necessary to bolster individual living standards, which slipped badly during the 1990’s and have only now regained their level prior to the start of the last decade,” Burleton argues.

The bank also says that corporate tax cuts remain in their infancy in Canada. “Looking forward, corporate tax relief will be at least as important as personal tax cuts and perhaps even more so for Canada’s longer-term economic welfare.”

TD says provincial governments should turn their attention toward lowering their heavy reliance on capital taxes. “The recent strength of corporate profit growth has deflected attention from the high rate of capital taxation in Canada, which is arguably the most damaging form of tax levied,” Burleton adds.
-IE Staff