In over his head

Have you seen the TV ads?

Just days away from introducing a huge deficit-financed stimulus package to foster spending, our government is spending millions on commercials for a new program promoting citizen saving.

Add self-destructive to our other major economic woes.

I'm referring to the new tax-free savings accounts (TFSA) first announced by Finance Minister Jim Flaherty back in February 2008. The Tories are obviously hoping to bag political credit for this initiative, but by any sane yardstick, the timing of this bonus for the banks should backfire in their faces.

The program represents the exact opposite of everything governments around the world are trying to accomplish. And at the same time, it offers next to no short-term value to Canadian taxpayers. As usual, the government of Stephen Harper is hoping to cash in on ignorance when we go back to the ballot box.

Hey, Michael Ignatieff, I hope you are watching - this is really just one more piece of proof positive that we can't trust Harper with Canada's economy. Period.

Everywhere around the entire globe, governments are countering the growing recession and possible depression with stimulus packages. The phrase means using all the force of government spending power to push the circulation of money and offset the depressive trend in hard times for individuals and companies to pull back from spending.

If governments don't counter the hoarding instinct, the result is loss of more jobs and less spending, reinforcing and prolonging the down-cycle.

Tax-free savings are exactly the wrong move at the wrong time. Here's a primer on why it sucks.

How TFSA works:

If you save up to $5,000 per year, the tiny interest you earn from the bank is tax-free. Meaning, if you manage to save $5,000 after tax for the full year and you're in the highest tax bracket and you get a higher-end return on your money (say, 3 per cent), your entire financial reward will be less than $75 total for the whole year.

Out of that will come any fees that the banking institution charges for the account or any transactions you happen to make. Bank charges can easily eat up most, if not all, of the minimal "benefits" of the account, leaving you with zilch.

So what's it for?

The intended and explicit purpose of this program, as outlined by Flaherty when it was announced, is to encourage increased savings. Of course, the intended purpose of the upcoming budget is to encourage spending.

Is it working?

Sure, it is. As expected, a number of banks and banking institutions are enthusiastically reporting significant uptake. The lesson here is that government tax policies do successfully drive citizen behaviour. Note to other parties: just think what decent tax incentives could do for clean, green job creation.

Why are people going for it?

The yearly limit is $5,000, but after 20 years of saving up to $5,000 each year, the tax benefits will grow in value into the thousands of dollars per year. So, diabolically, even though the short-term payout is peanuts, it's still smart for pretty much everyone to open a tax-free savings account. That way, if you're able to save money long-term or ever inherit or come into money, it will be worth your while in the future.

Who benefits the most?

In a word, the banks. Though in the short term, the benefits to individuals are minimal, bank institutions are major beneficiaries, both short-term and long-term.

While the same variety of investments are allowed in TSFAs as in RRSP plans, in practice the details of the plan and human nature mean that most people will leave this money in low-interest-bearing accounts for a long time while the banks make the real money using these savings to boost their own earnings.

Who really pays?

Two words: future governments. This year the plan will cost the government next to nothing (less than $5 million). But true to neo-con form, the cost will escalate over decades to come, long, long after this government is gone, gone. According to the budget documents, forgone revenue from this tax shelter will grow to over $3 billion annually in 20 years' time.

Are the banks repaying the favour?

Not exactly. They're leaving the Conservatives high and dry, happily raking in the new accounts while at the same time assuring Flaherty that they have no intention of making loans available to ease the credit crunch for businesses.

Then there was the Canadian Bankers Association demand to Dalton McGuinty just before Christmas that the Ontario government reduce their business taxes. Oh my god! This from a financial sector in which international taxpayers have invested trillions in bailouts.

What should Flaherty have done?

Instead of using the November economic statement to ignore the economic crisis and batter his opponents, any thinking government would have announced a two-year delay in introducing the TSFA.

What should be done now?

Let's face facts. Flaherty's romancing the banks has gotten him and the rest of us nowhere. When the banks asked for deregulation in the mortgage insurance business in 2006 while the sub-prime mortgage crisis was already unfolding in the U.S., his government bent over. That deregulation increased Canada's exposure to the crisis.

Clearly, the banks have no plan to be partners with the Canadian government in overcoming this recession. They've come right out and embarrassed Flaherty publicly. If they're happy to cast him adrift in his time of political need, shouldn't we be doing the same?

Canada's pre-prorogue drama feels so last year right now. But it's the lull before the storm. And once again, our next political crisis will crest in sync with the gigantic and far more exciting drama unfolding to the south. They're getting Barack Obama; we're getting Jim Flaherty. It seems so unfair. But a political opportunity will unfold as a result.

Obama is going to be a hard act to follow for the Conservatives. Once he's in, Harper's antiquated green resistance will start to look unhinged. As the Conservatives offer up a visionless $30 million deficit, add blowing the $12 billion surplus they got from the Liberals just three years ago to their pro-recessionary decision to press on with the TFSA plan.

There sure is a big story for the Opposition to tell here. Let's hope they get around to it.

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