The real Grit scandal

Forget sponsorship fiasco - other Lib abuses have sucked up way more cash

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Now that Paul Martin is back in the PM’s chair – barely – we’ll soon be treated to his promised public inquiry into the federal sponsorship scandal.

Of course, I love to see arrogant politicians get caught with their hands in the cookie jar. But there are lots of scandals out there that sucked up far larger sums of government cash than sponsorships ever did.

It’s just that in these other cases, the friends getting their pockets lined are the rich and powerful. So these abuses don’t get nearly the attention that a bit of baksheesh for Liberal bagmen generated.

If they were really after missing bags of money, the auditor-general, the media and the opposition should have been sniffing around in some of these closets.

The EI surplus

Workers in Canada pay 2 per cent of their first $39,000 in wages into the employment insurance system. Thanks to repeated cuts in benefits, most unemployed workers (close to 60 per cent at last count) don’t qualify for benefits. The result is a huge but artificial EI surplus every year since 1994 that’s now reached $50 billion.

The government says it’s a cushion for EI payouts in a future recession, but its own actuary says it only needs $10 to $15 billion for that. Instead, the money has been used to fund other priorities (especially debt repayment and tax cuts). It was stolen from the pockets of unemployed Canadians as surely as any crooked ad agency skimmed cream off a sponsorship contract. Total scandal: $40 billion since 1994.

Capital gains

If you make money flipping burgers at McDonald’s, you have to declare every grease-covered dollar on your tax return. But if you make money by flipping stocks and bonds, guess what? You only declare half, thanks to the “partial inclusion” of capital gains.

Incredibly, almost half the value of the exemption is claimed by those 100,000 lucky Canadians (0.5 per cent of taxpayers) who earn over $250,000 a year. No other loophole so targets the ultra-rich. When Paul Martin doubled the exemption to 50 per cent (from 25 per cent) in 2000, his officials estimated it would cost the government $600 million in lost taxes by 2004.

But the cost of the exemption has actually ballooned by $2.5 billion (from $2 billion in 1999 to a total of $4.5 billion a year today). That’s a cost overrun that makes the B.C. fast ferries project ($500 million over budget) look like a marvel of fiscal probity. Total scandal: $4.5 billion a year in lost personal and corporate taxes. Income trusts

There’s a gaping loophole in Canada’s tax system that allows businesses to completely avoid paying corporate income taxes. If it restructures as an “income trust,” a corporation becomes non-taxable, even if its real operations don’t change one bit. Every new conversion generates millions in new commissions for Bay Street brokers – but unfortunately costs the government even more in lost taxes.

Income trusts are now worth $90 billion and are growing fast. Lost taxes are valued at $400 million a year. Yet government looks the other way as the boondoggle continues.

In his 2004 budget, Finance Minister Ralph Goodale proposed some timid limits on income trust investments by tax-sheltered pension funds. Bay Street protested, and Goodale backed off.

Hundreds of thousands of Canadians can protest loudly for years to have EI monies spent on their designated purpose (namely, EI benefits for unemployed people), to little avail. Yet all it takes is a quick, powerful twist of the backroom screws by Canada’s financial elite to send our finance minister running for cover. Total scandal: $400 million a year and growing. Budget surpluses

Since 1997, when the budget was balanced, the government has repaid $54 billion in debt through six successive budget surpluses. Canada’s debt ratio declined from over 70 per cent of GDP in 1994 to less than 40 per cent. But most of that was due to economic growth. Even with no repayment, the debt burden would be 45 per cent of GDP today. What’s scandalous about debt repayment? Three billion dollars a year of it was “honest” – what the government sets aside each year in a “contingency fund” for the debt. All the rest, however, was engineered through phony and manipulative accounting tricks. Finance Canada consistently underestimates Ottawa’s revenue it also overestimates its costs. The result? Ottawa allocated $36 billion more to debt reduction than it budgeted for.

Convenient, isn’t it, that debt repayment is a fiscal goal that ranks near the top of Bay Street’s agenda (mostly because of its bullish effect on bond prices) but doesn’t rank in the top 10 priorities for average Canadians?

Total scandal: $36 billion in “unplanned” debt repayment between 1997 and 2003. Privatizations

In the world of IPOs (initial public offerings), a “successful” privatization occurs when all the new shares are snapped up by drooling investors, who subsequently bid up the company’s share price. This generates trading gains and commissions for the brokers, profits for the investors and lots of good publicity for the government. But does this mean the privatization is “successful” from the point of view of the taxpayers who used to own the company? Hardly, especially when government deliberately undervalues the companies it’s selling off, in hopes of generating this sort of feeding frenzy in the financial markets.

Ottawa has sold off many prize assets for billions less than they were truly worth. Think of CN Rail, for example, which was sold for $2 billion in 1995 and is now worth $15 billion on the stock market. CN’s share price was soaring within hours of the privatization because savvy investors recognized a fire sale when they saw one.

The sale of the air navigation system to NavCanada was similarly rigged. The auditor-general estimated that taxpayers received $1 billion less than they should have. Total scandal: at least $5 billion from undervalued privatizations.

There are oodles more cases of government waste and corruption. In every case, the main beneficiaries were the wealthy and the privileged: investors, brokers, the high-income earners who capture most of the benefit from tax cuts. In every case, the government’s actions were disguised by manipulative accounting and cronyistic politics.

But don’t hold your breath waiting for a public outcry when these abuses are brought to light. When government waste and corruption benefit the rich and powerful of the land, it’s truly a “dog bites man” story.

Jim Stanford is an economist for the CAW.

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