Tax Cuts Provide Short-Term Gain For Long-Term Pain

"The mini-budget does in fact provide for 2008 a fairly rapid Keynesian countercyclical shock that will certainly make economic performance less dismal than it otherwise would have been," it says. Assuming that the Bank of Canada doesn't react by raising interest rates, the mini-budget will add nearly two-thirds of a percentage point to growth in 2008, according to the think-tank. "The problems are in the medium and longer term," it warns. Over the following four years, the GST reduction and the cuts in personal income tax will stimulate consumer spending at the expense of business investment, resulting in higher inflation, interest rates, and dollar, and weakening Canada's export performance, it says. That stimulus will grow in each of the coming five years, amounting to a 1.86-percentage-point boost to overall economic growth in 2012, it calculates. "By cutting taxes that stimulate consumption in an economy that is effectively at full employment, the production of the economy will be pulled away from net exports and investment," it says. "The resulting increase in the exchange rate will only exacerbate the problem of adjustment of the Canadian economy to the higher dollar and a lower export orientation." It's a "pity" the Conservative government didn't use the opportunity to boost the underlying productive capacity of the economy or do more to encourage a shift in taxing power to other levels of government where it is needed, it says. An alternative to using its surplus to cut the GST and personal income taxes which will boost consumption now, would have been to use the surplus to encourage increased investment, it says. "That would have meant more jam tomorrow and not today but eventually more jam all around." ... http://www.canada.com/topics/news/politics/story.html?id=95cce553-7247-4273-8df3-c34479e93102

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