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Sponsorship shmonsorship

Jim StanfordWebsite

Yes, the scandal was sleazy. It was offensive to Quebeckers. It wasted $100 million (over four years) that could have been spent on much, much better things. It probably had criminal overtones.

Illustration of garbage cans filled with bags of money, a racoon and Capital Hill in the background

Like any other patriotic, cynical Canadian, I love to see   arrogant politicians get caught with their hands in the cookie jar. But surely I wasn’t the only one left yawning after weeks of banner headlines on the Liberals’ sponsorship scandal.

But was it really the most sleazy, offensive, wasteful and criminal thing the federal government did during Jean Chrétien’s three terms in office? Not even close. Clearly, the only reason this particular affair got so nauseatingly much air time was because it jibed nicely with the ideological predisposition of the corporate media and the right-wing opposition—namely, that the main function of government is to steal money from taxpayers and give it to their friends.

There are lots of other examples of the willingness of politicians to waste taxpayers’ money and line their friends’ pockets. 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 of the land—the ones who also own newspapers and fund conservative parties. So these abuses don’t get nearly the attention—from the media, from the opposition, even from the Auditor General—that a bit of baksheesh for Liberal bagmen generated. And in contrast to the pious pledges of a beleaguered Paul Martin to usher in a new era of financial integrity in Ottawa, these other scandals are treated as water under the bridge.

So in case I am ever appointed Auditor General (not much risk of that—I can’t keep track of my grocery money), here are my five favourite financial abuses perpetrated by the federal Liberals since 1993. These aren’t just things the government did that I disagree with. They are programs or policies that were decidedly dishonest, shady and manipulative, and through which Ottawa delivered tens of billions of dollars to friends in high places, never coming clean to taxpayers about what was going on.

The total cost of each scandal on my list is symbolized by little bags of money. Each bag represents $100 million—the maximum unaccounted value of sponsorship funds over the whole 1997–2001 period, before the program was reined in. 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. But then, maybe that isn’t the point.

THE EI SURPLUS Workers in Canada pay two percent of their first $39,000 in wages into the Employment Insurance system, supplemented by a slightly larger contribution from their bosses. It’s a regressive tax, since income above $39,000 isn’t taxed. Even this would be okay if the money were used for its intended purpose: paying benefits to working stiffs when they are laid off. Problem is, thanks to repeated cuts in benefits, most unemployed workers (close to 60 percent at last count) don’t qualify for benefits. The result is a huge but artificial EI surplus every year since 1994 that has now reached $50 billion in total. The government says it is a cushion for EI payouts in a future recession, but its own actuary says it needs only $15 billion at most for that. At any rate, Paul Martin has pledged that his government will never run a deficit (even one resulting from EI payouts during a recession), and this implies he plans to hold on to the EI surplus forever. The Liberals used this money 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 excess surplus 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. Since the wealthy (by definition) own most financial assets in Canada (especially those not sheltered in RRSP accounts, for which the capital gains exemption is meaningless), they pocket most of the value of this strange tax loophole. Incredibly, almost half the value of the exemption is claimed by those 100,000 lucky Canadians (0.5 percent of taxpayers) who earn over $250,000 per year—there’s no other loophole more targeted by the ultra-rich. When Paul Martin doubled the exemption to 50 percent (from 25 percent) 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 (to $4.5 billion per year today from $2 billion in 1999). In other words, this measure is costing Ottawa almost $2 billion more per year than Paul Martin said it would. That’s a cost overrun that makes the BC fast ferries project ($500 million over budget) look like a marvel of fiscal probity. So why does Martin continue to enjoy a reputation as a tight fiscal steward? Total Scandal: $4.5 billion per year in lost personal and corporate taxes.

INCOME TRUSTS There’s a gaping loophole in Canada’s tax system that allows businesses to avoid paying corporate income taxes. If it restructures as an “income trust,” a corporation becomes non-taxable—even if its real operations do not change a bit. In recent years, financiers have marketed the concept of trust conversion to businesses ranging from oil producers to hotel chains to the Yellow Pages. Every new conversion generates millions in new commissions for Bay Street brokers—but 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 per year for the federal government (and more for the provinces), and are growing just as fast. Yet government looks the other way as the boondoggle continues. Federal Finance Minister Ralph Goodale proposed some timid limits in his 2004 budget on income trust investments by tax-sheltered pension funds (a stance that would have only slightly slowed the future growth of the tax drain). Bay Street protested, and Goodale backed off. The power of high-rollers to preserve this rich, bizarre trough provides an insightful lesson for all of us in how Canadian democracy works. 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 per year in lost taxes, and growing.

BUDGET SURPLUSES The Liberals crow about how much they have reduced Canada’s public debt since 1997, when the budget was balanced. Since then, the government repaid $54 billion in debt through six successive budget surpluses. The debt ratio declined from more than 70 percent of GDP in 1994 to less than 40 percent at present (second-best in the G7). But five-sixths of that decline would have occurred anyway, thanks to economic growth and balanced budgets. Even with no debt repayment, the debt burden would be 45 percent of GDP today (still second-best in the G7). What’s scandalous about repaying public debt? About $3 billion per year of this debt reduction was “honest”: that’s how much the government sets aside each year in a “contingency fund,” explicitly earmarked for debt repayment unless required for some fiscal emergency. 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 end result is a budget so padded with wiggle room that an “unexpectedly large” surplus is inevitable. Then the finance minister gets to stand up in the House of Commons, to roaring applause from his backbench, and announce that—yet again—the government has exceeded its budgetary targets (thanks to phony fiscal projections, not tight fiscal control). 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. I guess that’s why Ottawa had to lie about what it was doing with the $36 billion. Thanks to those lies, today our debt load is 40 percent of GDP (not 45 percent). Meanwhile, hundreds of thousands of Canadians have to boil the drinking water that comes out of their taps. Total Scandal: $36 billion in “unplanned” debt repayment between 1997 and 2003.

PRIVATIZATIONS In the world of IPOs, 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 is selling off, in hopes of generating this sort of feeding frenzy in the financial markets. There’s growing evidence that Ottawa has sold off many prize assets for billions less than they were truly worth. Think of CN Rail, for example. Sold for $2 billion in 1995, it is now worth $15 billion on the stock market. Sure, Paul Tellier’s ruthless layoffs and cost-cutting explain some of that rise in value, but CN’s share price was soaring within hours of the privatization—not because of Tellier’s magic, but because savvy investors recognized a fire-sale when they saw one. The sale of the air navigation system to NavCanada was similarly rigged: Even the Auditor General estimated that taxpayers received $1 billion less than they should have. Petro-Canada is a more complex case; it was some years before its post-privatization market value took off. But even this later success can be traced in part to profits from mega-projects (like Hibernia) whose initial development was underwritten by the company when it was a Crown Corporation. The gurus of privatization argue government can’t manage economic resources efficiently. But what’s efficient about selling those assets off for less than their true value, just to make the privatizers look good? Total Scandal: At least $5 billion from undervalued privatizations.

There are oodles more cases of government waste and corruption waiting to be uncovered by a forensic accountant with a social conscience. In every case, the main beneficiaries were the wealthy and the privileged: investors, brokers and 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. Because when government waste and corruption benefits the rich and powerful of the land, it’s truly a “dog bites man” story.

Jim Stanford is an economist with the Canadian Auto Workers.

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