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Canada: Kind of boring

Economic news in the great frozen north has been rather boring of late, inflation up a bit, GDP up a bit, tax revenues higher than expected, aside from the strength of the Canadian dollar, life has been rather quiet up here. The reality is that a country as small as Canada (population wise) there is just so much news to report.  Of course the issue here is the structural deficit, which at 1.4% is lower than most of the rest of the OECD, but still persistent.    



Canada's 2011/15 challenge is to transform this structural deficit into a surplus, as it was during the 2000/2007 period.  The current government, looking at electoral favors, is probably inclined to let the current corporate tax rate drop by a few percentage point, but will be reluctant to raise the value added tax, the most efficient way of achieving this goal (don't trust me trust one of Canada's foremost economist here).

Taxing consumption is generally a good idea, there are problems, as the tax rate rises there is increased incentive for certain services to flip to the "black market", it is also regressive, since poorer people consume a greater percentage of their revenues than rich people.  Nevertheless, for an economy such as Canada, where the savings rate is marginal at best, incentive to save should be promoted.

In fact, studies show conclusively that VAT are one of the most effective and fair tax since all are treated equally are that distortions are minimal.  For the Conservative raising VAT after having reduced int two years ago would seem to be a walk back on their electoral promises, moreover, in the late '90s the Conservative were elected on a platform of removing the value added taxes that the Liberal administration had implemented...

That's Canada's challenge.  Ont he bight side we are not in America, where Congress will eventually have to figure out how to reduce the federal government's 40% deficit, especially since increasing taxes is off the table, but that's another story.




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