OTTAWA – The federal Conservatives’ pre-election promises targeted at families are already starting to take a toll on the country’s books.
The new income splitting plan and the doubling of the children’s fitness tax credit helped create a $3.2 billion deficit in October, according to data released by the Finance Department on Monday.
That’s twice as fat a deficit than would otherwise have been the case. The tax changes resulted in a $1.6-billion adjustment to revenue and, without that, Ottawa would have posted a deficit of just $1.6-billion for the month.
The Conservatives had pledged in the 2011 election campaign to introduce income splitting for families. This fall, they rolled out a slightly-amended version, as well as an increase to the fitness tax credit, both of which families can claim on their 2014 taxes, and just in time for the 2015 election.
Both 2011 promises were contingent on a balanced budget and a surplus; the former is still expected for 2015 and the current projection for the surplus is $1.6 billion.
Income splitting allows someone in a higher tax bracket than their spouse to share some of their income with the lower earner, so the family pays less taxes overall.
To what extent families will benefit from the plan is a matter of dispute — a 2011 study by the C.D. Howe Institute found 85 per cent of all households would gain nothing.
That was something on former finance minister Jim Flaherty’s mind when he spoke out against the policy in February.
At the time, Flaherty said he wasn’t sure the policy was the best way to spend the surplus.
“I would pay down public debt and reduce taxes more, myself, but I am only one person,” he said.
Flaherty’s viewpoint is sorely missed, said the NDP’s Peter Julian.
Since his departure, the government’s approach to the nation’s finances has been erratic, he said.
“It doesn’t surprise me at all that they’d start making these financial commitments and run us back into a deficit because they haven’t thought these things through,” Julian said.
The child fitness tax credit has also come under scrutiny.
A study published last year in the Canadian Tax Journal suggested the benefit favours higher-income households, and is more likely to be claimed by people in urban centres and those with at least one male child.
Income splitting was a key element of the 2011 campaign and the decision to implement it this fall means families will see the money back in their pockets just ahead of the next election, making it a vote-getter once more and a political risk for parties like the Liberals who oppose it.
The fact it’s contributing to a deficit is another flaw in the program, said Liberal finance critic Scott Brison.
“Effectively, 100 per cent of Canadians are going deeper into debt to finance something that will benefit only 15 per cent of Canadians,” said finance critic Scott Brison.
“Deficits today will be financed through taxes tomorrow.”
The Conservatives say 1.8 million families will benefit from income splitting, and all those with children under 18 will benefit from the other measures being introduced, such as the extension of the universal child care benefit.
That will take effect next year.
When income splitting was introduced, it was estimated to be a $2 billion program, while doubling the fitness tax credit was pegged at a cost of $130 million.
Though no one has yet to claim a dime from income splitting or the fitness tax credit, the government has to start recording the anticipated cost of the program right now. The $1.6 billion is a projection of the price tag from January to October 2014.
The suite of financial measures will take a huge bite out of a surplus once projected to hit over $6 billion next year, after years of government deficits.
The Conservatives further chomped away at the excess cash by announcing $5.8 billion in infrastructure funding this fall, most of it to be spent in the next three years.
Fiscal flexibility will be further reduced by the falling price of oil, but the Conservatives insist there will still be a surplus next year and that they’ll follow through on other financial promises that economists say are likely to leave the government’s cupboard bare.