Despite what Ontario Premier Doug Ford, shown above, says, a slight increase in taxes will not cause an economy-wide slump.Nathan Denette/The Canadian Press
Maybe you doubt that a reduction in little Canada’s carbon output can have much of an impact on global warming – given that China and India are busily building coal-fired power plants.
Maybe, even though many economists believe putting a price on carbon is the most efficient way of nudging millions of people into taking billions of small decisions to reduce their use of carbon-based fuels, you think these economists aren’t being entirely practical or realistic about how all of this is going to work.
Maybe you’d prefer to raise other taxes to subsidize low-pollution technologies, rather than taxing polluting ones.
Maybe you wonder if a few cents of tax on a litre of gasoline will lead anyone to drive less or buy a more fuel-efficient car. Maybe you think the only result will be to make fill-ups more expensive while doing little to nothing for the environment.
And maybe you think a carbon tax will drive the Canadian economy into recession.
All of those arguments against the carbon tax are worth considering and all have some degree of merit – all except the last one, that is.
On Tuesday, Ontario Premier Doug Ford said that Ontario was at risk of a recession if the federal government imposes a carbon tax on the province. He later doubled down on Twitter, writing that “the threat of a carbon-tax recession is real.”
No, it isn’t.
A recession is always a possibility, particularly after a 10-year cycle of economic expansion that is already unusually long in the tooth. The economy faces many threats, domestic and international. But the carbon tax is not one of them.
The Trudeau government plans to this spring impose a $20-a-tonne carbon tax on all provinces without their own carbon pricing – and Ontario is the largest offside province. The tax will, among other things, raise gasoline prices at the pump by 4.42 cents a litre as of April. This tax increase reverses a tax cut that Mr. Ford’s government brought in a few months ago, when it killed its predecessor’s carbon-pricing plan.
The slight drop in the price at the pump from the Ford tax cut has not led to an economic boom; a slight increase will not cause an economy-wide slump.
However, Mr. Ford is right about one thing: A government’s fiscal policy can lower a country’s short-term economic growth rate. For example, when a government removes a dollar of demand from the economy – either through tax increases or spending cuts – then, all else equal, the level of economic growth should drop by about $1. Removing enough demand can basically subtract an economy into a recession.
But to cause a downturn, the size of the tax increase, or comparable spending cut, would have to be a lot bigger than a few cents of tax on gasoline and other carbon fuels. And that big tax increase could not be matched by an equivalent increase in government spending, or other tax cuts.
If government takes money out of the economy in one area, and puts it back somewhere else, it’s like draining one end of a swimming pool and pumping water in at the other. The level of the economy, like the level of the pool, won’t fall. There won’t be a recession.
However, it would be a very different story if a government brought in a major tax increase with no equivalent spending increase, or introduced huge spending cuts with no counterbalancing tax reductions. That’s like draining the water out of both ends of the pool. Hello, recession.
That’s what happened to some European economies in the aftermath of the 2008 financial crisis. They experienced several years of austerity, as governments cut spending and in some cases simultaneously raised taxes. Economies already suffering a downturn – due to a drop in consumer and business demand – were driven deeper into recession by governments that further subtracted from economic demand.
The Trudeau government’s carbon-tax plan is a very different animal. The plan is to return every cent of the carbon tax to taxpayers, in the form of a rebate. The idea is, basically, to raise taxes on carbon-based activities, while effectively lowering taxes on everything else. It takes some money out of the pool, but puts it all back in.
Reasonable people can debate whether this is the best way to reduce Canada’s carbon output. But will it lead to a carbon-tax recession? No, it won’t.