Budget day in Ottawa

The Stephen Harper minority conservative budget tables its first budget today in Parliament. Finance Minister Jim Flaherty, a former Provincial conservative politician in the government of Mike Harris gets his chance to shift priorities from the budgets of the past thirteen years dominated by the Liberal Party.

The talk is all about tax cuts including the promised cut in the goods and services sales tax widely known and hated as the GST. The GST which delivers over 30 billion dollars to the Government`s coffers and has built in partial protection for the poor in the form of a rebate paid is scheduled to be cut by 1 percentage point.

The interesting question about this cut criticized by many economists but not by me for encouraging consumption as opposed to savings is the timing of the tax cut. Soon or later in the year   this will have a small effect on the timing of the purchase of big ticket item goods like automobiles .

Those who criticize the tax cut for encouraging consumption rather than savings presume that there is no slack left in the economy and that savings are automaticcally channeled into investment.
But the economy is slowing down in response to tighter money from the Bank of Canada.

In fact the decision to save and the decision to invest are two different decisions usually taken by different people.Decisions to cut back consumption affect the level of overall aggregate demand and therefore feedback into reductions in the national income out of which savings are a residual item. First you need the income before you can save. One must distinguish between planned savings and actual realized savings after the fact of income flows.

As the Bank of Canada is currently raising interest rates - the exchange on the Canadian dollar hit over 90 cents this morning
-investors are likely to be getting increasingly cautious, except in the white hot energy sector in Alberta. Hence a cut in the GST is welcome.Mind you, this does not mean that rolling back previously announced cuts in income tax is a good idea. This would be a major mistake. Furthermore tax cuts should not entail nor be an excuse for program cuts.

More about the budget later this evening.