Dangerous gains

It has to be one of the surest signs of a dubious government when an improved financial position seems to result in more potential dangers than benefits. And that seems to be entirely the case on the federal scene in light of the Globe and Mail's report that the federal surplus may be billions more than anticipated:

There's a good chance Ottawa will reap more tax revenue than forecast this year, meaning the Harper government may be able to gamble on having an extra $2-billion or so to spend on tax cuts in the 2007 budget, a senior economist predicts.

This is significant because it demonstrates how the Conservatives might find the means to cut taxes in Budget 2007 and still deliver on hefty promises to enrich spending for provinces on equalization, postsecondary education and infrastructure.

It's possible the budget surplus Ottawa's running this fiscal year has swollen by $1.8-billion to $2.8-billion above last November's forecast, economist Don Drummond says...

But Mr. Drummond, chief economist for Toronto-Dominion Bank, says the Tories may be able to count on this extra cash showing up again in next year's revenue if they decide this is part of a trend rather than a blip. This would allow them extra fiscal room for Budget 2007, a fiscal plan the Tories are expected to deliver March 20, long before the final size of this year's surplus is known.

He cautions that uncertainties remain, including the degree of slowdown in the Canadian economy and the tax revenue performance in the last third of this fiscal year, as well as year-end adjustments that could buffet results.

In other words, there's a distinct possibility that the Cons are looking for reasons to misread a temporary boost in revenue as a long-term phenomenon in order to justify another set of random tax cuts. Which would ensure that the money wouldn't be used on other priorities - and pose a real risk of pushing Canada back into the red within a matter of years, without any significant investment to show for the impending losses.

In contrast, the better course of action from a managerial perspective would be to use one-time revenues on one-time expenditures. But given that the Cons have shown that they're looking for excuses to systematically hack away at government even when there's no need to do so, the odds of such a move seem remote at best. About the only realistic upside would be if the Cons choose to use the money to pay down the debt...but it seems far too unlikely that PMS would see even that as the most politically beneficial option, compared to slashing taxes and letting some future government clean up the mess.

Of course, there's always the prospect of the opposition parties deciding not to vote for a budget which seems to misread Canada's fiscal situation. But then the prospect of increased revenue giveaways could also raise the perceived political costs of voting the budget down.

In sum, there's almost nothing but short-term political upside for the Cons if they choose to go against better judgment by pretending that temporary revenue increases will last forever. And unfortunately, it will be Canada as a whole which bears the long-term costs if that position wins out.