The minority government won by Stephen Harper’s Conservatives clearly makes running Canada very challenging and complex. But it also presents an opportunity for the Tories to abandon weak promises and to focus on critical issues that often went ignored during the election campaign.

The prime minister-designate had yet to name his cabinet as Investment Executive went to press. However, a shortlist of candidates for the all-important role of finance minister has quickly emerged. Monte Solberg, who served as finance critic when the Conservatives were in opposition, is one clear option. Weighing against Solberg is geography. He is from Alberta, and Harper may prefer to give the high-profile job to someone from central Canada to shore up support in the region.

A strong possibility from Ontario is former provincial finance minister Jim Flaherty, who has finance experience and political location on his side. Other outside candidates include two former Flaherty colleagues in the Ontario government: John Baird and Tony Clement. Alternatively, Harper could reach into Quebec, where Lawrence Cannon is being touted for a top post.

Whoever ultimately gets the job isn’t as important as what he or she does with it. The Conservatives campaigned on a number of relatively high-profile promises, including cutting the GST, restoring the federal/provincial fiscal balance and deferring capital gains taxes on reinvested profits. They also pledged to go ahead with the Liberals’ proposed reduction of the dividend tax rate and planned corporate tax cuts, but not personal income tax reductions.

It remains to be seen how much of the talk actually makes it into the new regime’s first budget, which is expected as early as late spring. Given the government’s narrow minority position, it’s also unsure whether what is proposed will ultimately be supported by the House of Commons.

“The Conservatives will have much less policy freedom than they would have liked,” says economic analysis firm Global Insight Inc. “This does not bode well for a coherent policy program and a strong government.”

The expectation is that, in the early days at least, the Harper government won’t deviate too far from its campaign promises. Mark Mullins, executive director of the Vancouver-based Fraser Institute, suggests the Tories propose a budget that delivers on all of its tax-cut plans straight away, on the basis that the Opposition wouldn’t dare attempt to defeat it so early. It also makes sense for the Tories to make a show of immediately delivering on their promises, he adds.

There are other reasons to give Harper some space. The Liberals face a leadership race and a political rebuilding process before they will want to fight another election. The New Democrats and the Bloc Québécois, as well, don’t stand to gain much from a quick election. Arguably then, the current environment presents an opportunity for the new government to be bold.

The Tories may think a GST cut is a bold step, but it is hardly visionary, not particularly conservative, and does nothing to address some of the real systemic economic issues facing the country — such as declining productivity and the impact of an aging population. If it truly wants to position itself as “standing up for Canada,” the new government should perhaps contemplate taking advantage of the current situation to introduce some dramatic reform.

Mullins says he expects, and recommends, that the Tories stick close to their election platform in their early policy actions. Nevertheless, his organization has made a number of recommendations of its own recently, aimed at attacking the productivity problem. Indeed, in a report published in January looking at the productivity issue and tax policy, the Fraser Institute declared: “Canada is currently facing a productivity crisis,” a situation it blames on a lack of capital investment.

“Improvements in Canada’s future productivity will largely depend on its ability to increase business investment in new machinery, equipment and technology,” the report said. To that end, it calls for lower corporate taxes, the elimination of corporate capital taxes, and other business-friendly adjustments to property and sales taxes. The corporate tax cuts first proposed by the Liberals will certainly be welcome, but it is also arguably too meek a step to have meaningful impact on productivity.

A package of bold reforms is improbable, says Jack Mintz, president and CEO of the Toronto-based CD Howe Institute, but there is certainly a need for policy responses to address some of Canada’s persistent structural issues. “On the tax side, I think we need to put priority on reducing high marginal rates affecting work, saving and investment,” he says.

@page_break@Mintz recommends a major expansion in RRSP contribution and age limits, along with the introduction of tax-prepaid savings plans to limit taxes on savings. To help low-income earners, Mintz suggests that RRSPs be dropped from the definition of income used to clawback social benefits, and that a working tax credit to supplement the income of low income earners be introduced. He would also drop the pension credit rather than raising it, as the Tories have proposed.

On the corporate side, Mintz says that he would undertake major tax reform, both to reduce rates and make the system fairer. He would also use the prospect of a GST cut to entice the provinces to reform their sales taxes.

Other think tanks have also called for significant tax reform to help spur the economy. In a 2004 paper, the Montreal-based Institute for Research on Public Policy proposed a sweeping series of reforms, including: lower corporate and capital taxes; accelerating capital cost allowances on new investment; introducing TPSPs; expanding the personal income tax brackets; cutting the rates on the middle brackets; and increasing the basic personal exemption.

Various groups have distinct reform strategies, but common to all is a call for lower taxes, which would of course have negative implications for government revenue. Given the recent string of large budget surpluses, a tax cut does not seem like an insurmountable huge problem, although it does highlight another priority for the new administration: more credible budget forecasting.

Although a surprise surplus is generally welcomed, the CD Howe Institute points out that the practice has allowed federal program spending to grow out of control, because the “surprise” surpluses are inevitably spent, rather than returned to taxpayers in the form of tax cuts or further debt reduction.

In their election platform, the Tories pledged to run a balanced budget but, just as important, they also proposed to set up an independent budget forecasting office. Hopefully, it’s a promise they’ll keep.

There are plenty of other issues that the new finance minister could also address. The capital markets would probably benefit from the introduction of a national securities regulator, a beast that has been studied and recommended for decades, without ever becoming a reality. The constraints on the banking industry, such as the moratorium on domestic mergers and foreign ownership restrictions, also remain a long-unresolved issue. Although such matters pale in comparison with the productivity and demographic issues, they are nonetheless important national problems that have been neglected for far too long.

The new finance minister will have no shortage of areas in which to make his mark, but major reform seems unrealistic to many in a début budget.

“I honestly think that they should stick completely to their platform,” says Mullins. “There is enough there to keep them busy for the 2006 budget.”

However, Mullins adds: “The 2007 budget is a different matter, because this will probably be an election budget. That would be the time to accelerate and expand their tax cuts and to start delivering on resolving the fiscal imbalance through federal-provincial negotiation.”

To hope that a rookie finance minister is going to step up and tackle some of the large, politically-sensitive issues facing the country in the context of a weak minority government is the height of optimism.

But, if the party’s goal is to one day prove worthy of a majority, the Tories should keep in mind Virgil’s dictum that “Fortune favours the brave.” IE