I’d like to tax the world in perfect harmony…

Jim Flaherty may have just become Dalton McGuinty’s new best friend. More on that in second.

McGuinty brought forward his first recession budget today, joining virtually every other jurisdiction in the world by sending the province spiraling into deficit (including Newfoundland!). The bulk of the spending is on infrastructure - 32.5 billion over two years. If you're curious where everything else is going (and I know you're not), you can read the full budget here.

But let’s be honest – there's only one thing in this budget people will be talking about. And the word of the day is “harmonization”, after McGuinty’s pledge to harmonize the GST and PST in Ontario:

Ontario will also undertake major tax reforms, including a move to implement a harmonized sales tax that will combine the 8 per cent provincial sales tax with the 5 per cent federal goods and services tax. The move will save Ontario businesses $500-million in paperwork costs, Mr. Duncan said.

But it will also raise the price of many goods and services, including essentials such as gasoline, home heating oil, newspapers and coffee, said New Democratic Party Leader Andrea Horwath.

Harmonizing the taxes will add to “the burden of average families who need help the most and give that money to those that need help the least,” she said.

To cushion the blow of the tax changes, the federal government is providing the province with $4.3-billion in transitional funding over three years. Ontario will use the money to cut cheques totalling $1,000 to every family in the province that earns less than $160,000. Individuals who earn less than $80,000 will get $300.

This is certainly a risk. The broken promise on health care premiums was a giant target that John Tory failed to hit last election campaign – McGuinty has now drawn a giant target for the next Tory leader shoot at in 2011.

You can be sure that the “tax on everything” attack that buried Stephane Dion will be heard loud and clear across Ontario over the next two and a half years. But before we all pile on McGuinty for doing something which may turn out to be hugely unpopular, it is important to keep in mind the big difference between this and the Green Shift – primarily, that McGuinty is in power. A great policy that is politically toxic is useless to an opposition party because it will never see the light of day. A great policy that is politically toxic at least serves the greater good if it’s brought in by a government in power. After all, being in power is about bringing forward positive change – not just running for re-election.

So this raises two distinct questions:

1. Is this a great policy?
2. Is it politically toxic?

On the first question, most would tend to agree this is the right thing to do from an economic perspective (yeah, yeah, it's the National Post, but still...). And with counterbalancing measures, exemptions, and rebates in place, it likely won’t be too punitive on Ontario’s poor. It’s not the thing legacies are built on, but it’s solid policy.

As for its' toxicity? Well, anytime you mess around with tax shifting, there are risks. But, as the teaser said, McGuinty’s secret weapon in all of this may be his old foe, Jim Flaherty. McGuinty is doing exactly what Flaherty has asked for and, one presumes, the Finance Minister will be quite supportive of this. That certainly puts Flaherty's wife - and PC leadership candidate - Christine Elliott in a bind but, either way, it should provide McGuinty with some cover on this one. He'll still be vulnerable on the left, but with the federal Tories and most business groups onside, his rank flank should hold up.

Don't get me wrong - McGuinty will take a hit on this one. But, I don't think it will be a fatal one.