IMF pressures Ottawa to stress tax reductions

By Eric Beauchesne, Southam Newspapers, 20 November 1999

The global body says the federal government should abandon its 50-50 plan for dividing up surpluses

OTTAWA - The International Monetary Fund is pushing the federal government to abandon its 50-50 formula for dividing up future surpluses and instead devote the lion's share to debt and tax reduction.

The global financial lender of last resort is also warning the government against its plans to extend employment insurance maternity benefits to a full year, which it says would be a retreat from earlier EI reforms that it claims have helped reduce unemployment.

Instead, it wants further EI reforms, such as cutting regional benefits and imposing higher premiums on employers whose workers are repeat EI users.

However, Jean Michel Catta, a department spokesman, said the issue of how to divvy up the surpluses is part of a national debate. But he added that the government will not retreat from its plan to extend maternity benefits because the extension is "the right thing to do."

The report released Friday by Finance Minister Paul Martin argued that cutting the debt and taxes would be more beneficial economically in the long run than increasing spending on health and education.

"Debt reduction and income tax reform should be the top priorities in allocating the prospective fiscal surpluses," it said in its annual financial and economic assessment of Canada. "While some additional moderate spending initiatives in the areas of education and health care would be useful, debt reduction and reform of in- come taxation are likely to produce more significant long-term benefits for the economy."

In the last election the government promised to devote one-half of any surpluses during this term in office to new spending, and the rest to debt and tax reduction.

The IMF report was pounced upon by business, which along with the opposition Reform and Progressive Conservative parties, have been harsh critics of the 50-50 formula, which they charge opens the door to a massive spending spree by the Liberals.

"We've always said tax reduction needs to be the No. 1 priority, and can no longer take a back seat to program spending," said Canadian Chamber of Commerce president Nancy Hughes Anthony. "Leftovers are just not good enough and we're happy to see the IMF support that."

Fears that the Liberals were embarking on a massive spending spree were heightened by the recent leak of finance department projections of $47 billion in spending priorities over the coming five years.

Martin, in releasing the report, made no reference to the IMF’s call for faster tax and debt reduction or its criticism of new EI spending plans.

Instead, he focused on the IMF's favourable assessment of the health of the economy and improvement in federal finances.

"Once again, outside experts are telling us that Canada is on solid ground economically with low inflation, low interest rates, a declining debt-to-GDP ratio and the lowest unemployment rate in a decade," Martin said.

The IMF report urged the government to speed up its pace of debt reduction, not only devoting the $3 billion a year contingency reserve to paying off debt but also any extra revenue that comes from stronger than forecast economic growth.

Because of the uncertainties of the future costs of supporting an aging population, the IMF said now would be a good time to get the debt down faster to be better prepared to be able to cover those costs.