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The mystery of the missing tax money

At first glance, it was a Yukon budget like any other: the feds gave us a billion dollars, and our government bragged about what a great job it was doing managing the firehose it sprays the money around with.

At first glance, it was a Yukon budget like any other: the feds gave us a billion dollars, and our government bragged about what a great job it was doing managing the firehose it sprays the money around with.

However, a closer inspection reveals a strange mystery. While Yukon government spending will hit record levels next fiscal year, income tax revenues will be lower than 2012-13, the last year where we have hard actual figures reported.

The numbers involved are big. Total appropriations will hit $1.3 billion in 2014-15, an increase of 20 percent or $220 million from 2012-13. Over the same period, personal and corporate income tax revenues are both expected to fall. The total income tax take is expected to be 3 percent lower at just $96 million.

Think about what this means. The Yukon government is spending $220 million more, mostly on people and contractors. Yet the income taxes paid by people and companies in the Yukon is going down.

Theoretically, there are a few possible explanations for this.

One is that the big increase in government spending went to Outside consultants and companies. It is unlikely, however, that all $220 million could have leaked away like that unless we bought some big ticket items manufactured Outside. And I didn’t see the press release announcing the Yukon Air Force was buying a half dozen F-35 fighter jets.

Another possibility is that the hundreds of new Yukon government employees hired over the last couple of years all decided they didn’t like their jobs and moved away on December 31, just in time to pay their taxes in another province after collecting their salaries here all year. Or, alternatively, they could all be engaged in a massive tax evasion conspiracy.

Again, not very likely.

Could it have been tax cuts? The possible culprit is the proposed reduction in the Yukon small business tax from 4 per cent to 3 per cent, but this affects only a portion of the tax base. And, anyway, the fall in corporate tax revenues started in 2013-14, before the recently announced small business tax cut will take effect.

So where did the tax revenue go?

Sherlock Holmes wasn’t an economist, but I think his powers of deduction would have taken him to the answer: the increase in government payrolls and contracts did actually increase tax revenues, but it was more than counteracted by the Yukon’s private sector economy driving its sled off a cliff.

And it must have been a pretty big cliff, given that it had to be bigger than the huge increase in government payrolls and spending over the last couple of years.

With an election coming up in two years, this is a serious situation for the government. The budget speech outlined its proposed response: “At a time when the private sector is facing economic challenges, this is the time for the Yukon government to step up to the plate and invest in infrastructure that will facilitate and stimulate the private sector.”

This is classic Keynesian economics, attempting to stimulate the demand side of a slumping economy with government spending. President Obama did it during the financial crisis in the U.S., as did the Canadian government.

However, the Yukon government goes further than this. They don’t just believe in stimulating the economy with government spending during slumps, they also believe in doing it during boom years. The Yukon government is in fact a rare example of super-Keynesian fiscal policy. If you look at Yukon government spending since 2005, it rose every year whether the private sector was doing well or poorly.

Economists on Fox News would be appalled. The Yukon government fiscal policy is even to the left of the Obama administration.

Even if the Yukon government policy leads to an ever bigger role for the state in the Yukon economy, at least they are not doing it with borrowed money. The U.S. and Canadian governments both had to borrow to finance their Keynesian spending splurges. The Yukon government gets so much cash from Ottawa that even after the planned spending binge for next fiscal year, there will still be around $140 million in the government’s bank account.

This means they can continue the pre-election spending in the 2015-16 fiscal year.

It is difficult to analyze the Yukon budget in normal financial terms, since it gets so much money from Ottawa. It isn’t really meaningful to talk about Keynesian or non-Keynesian fiscal policy, since the Yukon government’s policy is to get money from Ottawa and spend it. The only real fiscal question a Yukon finance minister has is how much of Ottawa’s money to save up in the first few years of a government’s mandate to spend in the run-up to the next election.

The recent budget answered half that question, and next year we’ll see how much of the remaining $140 million in the bank will get spent.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can follow him on Channel 9’s Yukonomist show or Twitter @hallidaykeith