Next week at this time my economist buddies will be on the lip of their seat anticipating the first Conservative federal budget since the early 1990’s.  What’s up?  What’s down?  Will they actually cut the hated GST by 1%?

For Stephen Harper is has been a long time coming.  He is a bit of an economist cousin of mine.  He did his Master’s degree in Economics from Calgary, while your loyal scribe did his Master’s in Agricultural Economics from Guelph.  We got to discuss that together last year on his visit to Chatham.  Seeing what he puts in the budget will give us some clues of how he will govern and how long he expects this parliament to last.

Let me give you some clues.  Stephen Harper’s cabinet is very Conservative.  When Jim Flaherty was the Ontario treasurer for Mike Harris he redefined what being Conservative meant.  It is easily the most conservative cabinet since the Mulroney years.  So expect tax cuts and government cut backs.  The reins of the country’s finances are on a new leash.

I have always advocated a cut back of the GST.  When it was enacted by the Mulroney administration it was suppose to replace the old federal manufacturing tax.  It did that but it never captured all the taxes the government was hoping for.  Clearly though, it captured enough.  With federal surpluses starting under the tutelage of Paul Martin and Jean Chretien, a 7% GST always seemed too much to me.  I thought the Liberals might have cut it.

So when Stephen Harper said during the election campaign that he would lower the GST to 6% and then 5% it made sense to me.  Governments running surpluses have a responsibility to give back.

There are some of my economists cousins who think the GST is the least evil tax of them all.  The thought is that income taxes can be far more harmful with regard to dulling the incentive to work, save and invest.  So raise those consumption taxes (GST)!  Its been done in Japan and Germany.

Cutting either income taxes or the GST needed to be done.
The Liberals under Paul Martin did that.  In fact before the election was called former finance minister Ralph Goodale had made another significant round of income tax cuts.  The Harper government has said that they would repeal some of that but then cut the GST.  I wouldn’t be surprised if they did both.  With oil in the $70 range and the federal surplus growing as I write they could easily do both.

However, it’s not all gravy, there is a spending side to any government fiscal equation.  The Conservatives have big commitments to Canada’s defense.  They want to build three Canadian made, armed heavy ice-breakers, capable of carrying troops and having them stationed in Iqaluit

They also want to buy three new strategic lift aircraft.  In the past Canada has hitched a ride with the Americans or rented a plane from the Russians.  That might have been cheaper but Harper has said it isn’t good enough.  So pencil those big aircraft in.

Regrettably last week in Afghanistan Canada lost four of its own when they were killed by an IED along a road north of Kandahar.  Nobody really knows what this commitment to Afghanistan is going to cost.  The British and Dutch are set to join the Canadians.  The cost to Canadians could escalate exponentially.

It sounds different doesn’t it from past Liberal administrations.  The kicker might come when we see how much they are earmarking for Canada’s farmers.  The Liberals slashed agricultural spending over a 13-year period.  Made no sense but they seemingly didn’t care.  It finally caught up with them in 2006.  Harper is committed to $500 million in annual funding for a farm revenue insurance program.  After the most militant farm winter in Canadian history you might actually increased funding beyond $500 million.  If not tractors will surely once again be on the roads, bridges and border crossings.

It will be interesting to see how the Bank of Canada meshes its monetary policy with Harper’s fiscal policy.  Dodge is independent of Harper but he clearly worked closely with Paul Martin.  Harper’s tax cuts could be seen as inflationary, putting more money into an already overheated economy such as what we have in Alberta and the greater GTA.  Dodge will have to find a way to handle that.  Higher interest rates could surely follow.

I haven’t even mentioned health care.  That’s the big one with the federal government always seemingly playing the heavy with the Canada health act.  The provinces always demand more funding.  Stephen Harper has promised to “check” the growing fiscal imbalance.  The budget should give us a few clues on how that is going to play out.  At the end of the day there will be a new fiscal blueprint.  We’ll just have to get used to it.