Finance document predicts tax cuts wouldn't work

The Globe and Mail

By SIMON TUCK
Monday, June 16, 2003 - Page B1

OTTAWA -- U.S. President George W. Bush's proposed economic stimulus package would have done little to boost his country's sluggish economy in the short-term, while threatening the long-term health of key social programs, according to a recent document prepared for Finance Minister John Manley.

The document, dated Jan. 10, only three days after Mr. Bush unveiled his stimulus package, plays down both the expected effectiveness and wisdom of the U.S. plan.

"It should be noted that the U.S. federal government is already in a fiscally unsustainable position, facing large and growing deficits just beyond the 10-year budget window as the population ages," the document states. "The proposed stimulus plan would worsen the long-term outlook and make future reforms of these major retirement and health care programs all the more difficult."

Mr. Bush's original plan was to cut taxes by $670-billion (U.S.) over 10 years, but that amount was eventually cut by more than half before it was approved last month in the U.S. Congress.

Ottawa's assessment of the original plan was written by Department of Finance senior analyst Suzanne Kennedy, in the midst of a series of public anti-American remarks made by Canadian politicians and senior officials.

Less than two months earlier, Françoise Ducros, Prime Minister Jean Chrétien's official spokeswoman, resigned after she was overheard calling Mr. Bush a "moron" at a NATO meeting in Prague.

A month after the departmental memo, Liberal MP Carolyn Parrish said she hated "damn Americans" because of their aggressive position on Iraq.

The memo also dismissed the possible effect on the competitiveness of Canada's tax regime compared with that in the United States.

"The proposed U.S. tax changes would not affect the Canadian corporate tax rate advantage or the Canadian advantage in capital gains taxation," the document states.

"The Canada-U.S. personal income tax burden gap at middle incomes and upper incomes was expected to widen over the next few years under the U.S. tax reduction plan."

"The proposal to accelerate marginal personal income tax rate reductions means this will happen sooner, but does not mean the gap will be wider than previously anticipated."

But a Canadian economist said Ottawa's assessment of the Bush tax cut plan is supportable. "I would certainly agree that it looks pretty bad in terms of the U.S.'s fiscal future," said Yvan Guillemette, an economist at the C.D. Howe Institute in Toronto.

Ms. Kennedy couldn't be reached for comment, but a Department of Finance official said the document reflects independent reviews of Mr. Bush's plan. "It's not so much an assessment on our part."

The document, obtained by Ottawa researcher Ken Rubin under access-to-information laws, wasn't the only time the two governments expressed opposing ideas about fiscal policy.

Ottawa has been cutting taxes in recent years, but not as aggressively as Mr. Bush's administration. Mr. Chrétien, meanwhile, hasn't been shy about talking about Canada's better fiscal performance in recent years.

The Prime Minister drew criticism last week from back-bench Liberals and opposition MPs for comments a week earlier in which he criticized Washington's projected $500-billion (U.S.) deficit.

During the G8 summit in France two weeks ago, Mr. Chrétien spoke of his concerns about growing deficits among the world's key industrialized countries. But he told reporters later that he had assured Mr. Bush that reports of his earlier criticism about U.S. policies had been erroneous.

Mr. Bush's original plan was to cut personal and corporate taxes by $670-billion over 10 years, in a bid to stimulate the economy. Critics said the plan would be a windfall for the rich and that the stimulus wouldn't kick in until it was too late to help the slowdown.

But late last month, Mr. Bush won a major political battle when a modified, $330-billion tax-cut package was approved by Congress.