Canada West Foundation Blog

By: Larissa Sommerfeld, Policy Analyst

Canada’s budget was tabled on March 29 and it includes some interesting changes related to water policy. Here are the highlights:

• Department of Fisheries and Oceans (DFO): While we’ll have to wait until the Government’s Budget Omnibus Bill is tabled to find out whether there will be changes to the Fisheries Act, Minister Flaherty announced $10.5 million for the DFO to support “key fisheries science activities”—which is essentially monitoring of key commercial fish stocks. But overall, the DFO faces cuts of about $4 million this year, $13 million for 2013-14 and $79 million after that.
• Elimination of the National Roundtable on the Environment and the Economy (NRTEE): The NRTEE is over twenty years old and is a well-respected, arms-length organization with a Parliamentary mandate to “promote sustainable development advice and solutions”. Over its history, the NRTEE has focused on economic and environment issues related to climate, water, energy, biodiversity and governance. In fact, Canada West Foundation’s Shawna Stirrett authored the Round Table’s most recent publication. It’s unfortunate that this reputable organization will be dissolved—particularly when issues related to the interface between the economy and the environment are arguably more important than they’ve ever been.
• Environment Canada: Environment Canada will face large cuts for the foreseeable future: $20 million (2012-13), $60 million (2013-14) and $90 million after that. 
•  First Nations: The federal government committed $330.8 million over the next two years to build and renovate water infrastructure on reserves. This money is also meant to support the development of a long-term “strategy to improve water quality in First Nations communities.” This is a step in the right direction; a prosperous nation like Canada shouldn’t have the water problems of developing countries, as many argue is the case on reserves across the country.
• Flood mitigation: In response to the devastating floods of 2011, the government has committed $99.2 million over three years to “ assist the provinces and territories with the cost of permanent flood mitigation measures undertaken for the 2011 floods.” Better still, the government wants to move toward a nationally led program: “the Government is also committed to discussing with the provinces and territories the development of a national disaster mitigation program, recognizing that mitigation can lessen the impact of natural disasters on vulnerable communities and reduce the costs associated with these events.” This is a move that should be applauded; proactive measures in flood management are always good news.
• Infrastructure: A series of financial commitments were made to both the provinces and the Federation of Canadian Municipalities to improve water infrastructure. While municipalities will likely see this as positive, others may argue that continuing grants isn’t a good policy choice. While Canada does indeed face a major water infrastructure deficit that requires billions to fix, many argue that the prices of water treatment and conveyance should be increased to fund the upgrades rather than relying on government funding.
• Lake Winnipeg: Since 2008, the federal government has funded the Lake Winnipeg Basin Initiative. The Initiative has goals that include: reducing blue-green algae blooms, ensuring fewer beach closings, and restoring the ecological integrity of the lake. While no dollar amount was specified in the budget, the Government stated that it’s committed to continue funding activities targeted at restoring the lake.
• Mining Regulations: Environment Canada administers the Metal Mining Effluent Regulations, which regulate the deposit of mine tailings and other waste “produced during mining operations into natural fish bearing waters.” According to the DFO, these regulations are “among the most comprehensive and stringent national standards for mining effluents in the world.” These regulations will be expanded to non-metal diamond and coal mines. This is a change that truly makes sense, and probably should’ve been made much earlier.
• National Resources Canada (NRCAN): NRCAN is slated to receive $23 million over two years for new satellite data reception facilities as well as the development of a data management system. These systems can be used for a variety of activities ranging from flood mapping to detecting oil spills. This is a step in the right direction: more knowledge and data will lead to well-informed policy.

Overall, there’s a mix of positive and negative developments outlined in the 2012 budget. We’ll just have to wait and see what impacts these changes will have.

By: Michael Holden

“The fiscal restraint that many expected from this budget is more akin to paper cuts than deep wounds.”

The 2012 federal budget was, for all intents and purposes, the first delivered by the Conservative government under majority rule. It was expected to give us our first glimpse at how the Conservatives intend to govern over the next several years. Many assumed that the result would be a fairly dramatic shift toward fiscal conservatism and smaller government. The reality, by contrast, is decidedly middle-of-the-road. The Conservatives have delivered a prudent budget, one that largely fails to live up to the hopes of strong fiscal conservatives, but also largely fails to live up to the fears of their opponents.

To be sure, specific elements of the budget, such as delaying Old Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits until age 67, are bound to attract controversy and spark debate over the coming weeks and months. There are also deep cuts in some areas, among them foreign aid and the CBC. However, the budget also contains several initiatives that are either welcome or overdue (eliminating the penny leaps to mind). But in the final analysis, while the budget itself is a thick document, filled with a wide range of initiatives, this is, on the whole, a cautious and incremental plan. This is true especially considering initial expectations that the budget would pare back government spending in a big way.

In terms of the priorities outlined in the budget – once again called an “Economic Action Plan” – there is a clear emphasis on measures aimed at promoting economic growth and job creation. In particular there are several programs and initiatives that are recognizable as clear priorities for western Canada. These are discussed further below.

Budget Overview

As expected, the budget established an accelerated timeframe for eliminating the deficit and restoring fiscal balance, primarily focusing on the expenditure side of the equation. In last year’s budget, the deficit for the current year was expected to be $32.2 billion, a figure amended in November to $31 billion. Owing to a combination of resurgent revenue growth at the end of the year, spending restraint and lower-than-expected interest payments on the national debt, the deficit for this year is expected to be $24.9 billion. Moreover, the federal government now plans to balance the books in four years (2015-2016), one year ahead of the schedule laid out in last year’s fiscal plan. In fact, barring an unexpected downturn in economic fortunes, the budget will most likely be balanced within three years.

One of the big items that everyone was waiting for in this budget was news on the extent to which the government would be cutting program spending in the years ahead. This is the part of the budget where, depending on their point of view, people will be either the most disappointed or the most relieved.

Although many of the details still have to be ironed out, the federal government announced that its review of department spending will yield ongoing savings of $5.2 billion per year by 2016-2017. This total represents about 6.9% of the spending that was subject to the review process, but only 2% of overall federal spending. In addition, about 19,200 federal government jobs will be cut, about one third of which will be through attrition.

While these cuts represent real reductions for individual departments and agencies, it’s important to keep in mind that, in the aggregate, they are based on spending levels that have grown dramatically in recent years. Since the first Conservative minority government in 2006, federal spending has increased by 38.7%, while the federal public service expanded by 15.3% (adding more than 60,000 jobs in the process). When viewed in that context, the proposed budget cuts do not exactly suggest a broad-scale withdrawal of the federal government from the public arena.

In addition, other components of federal spending, like transfers to the provinces and to persons, will be rising throughout that period. Old age benefits are the obvious exception, but those changes don’t even begin to kick in until 2023. As a result, the overall effect of the government’s spending restraint will not be a decrease in total program expenditures as much as a slightly lower rate of growth over the forecast period.

Specific Programs and Initiatives

For the most part, the federal government’s fiscal plan delivers on the expectations set out in the Canada West Foundation’s pre-budget commentary. Perhaps most notably, it includes a commitment to modernize the regulatory system for major project reviews with the goal of a “one project, one review” approach. This approach is designed to reduce duplication, the administrative burden on businesses and the timelines for approval. While the specifics are still to be determined, this is a welcome development for western Canada, provided that it does not result in an abdication of government responsibility in the area of environmental stewardship.

The budget also contains measures aimed at job creation and addressing labour shortages in western Canada. These include some modest reforms to the Employment Insurance program, an enhanced youth employment strategy, hiring credits for small businesses and improvements to the Temporary Foreign Worker Program. The budget also mentions improvements to Canada’s immigration system, focusing on economic migrants that meet the labour needs of specific provinces and territories. However, there are few details on what that might mean.

Perhaps most significant for the West is new money for First Nations infrastructure, education and measures to improve training and incentives for the on-reserve Aboriginal population to enter the labour force. In its various consultations and roundtable discussions, the Canada West Foundation has heard repeatedly from western Canadian business and policy leaders that more needs to be done to improve living conditions on reserves as well as to improve Aboriginal participation in the workforce. In contrast with the aging population generally, the Aboriginal population is young and growing quickly. As such, they represent a significant, relatively untapped resource of labour in the West. On this issue, the measures contained in the 2012 budget represent a step in the right direction.

As we looked for in our pre-budget commentary, the 2012 budget also targeted spending cuts to specific areas and avoided cross-the-board measures that might have penalized effective or valuable programs. To be sure, there were few details, as usual, offered in the budget as to which exact programs would be affected by the plan, and as noted earlier, some will be unhappy about the areas that were targeted relatively heavily. But in general, the spending cuts reflected a gradual reshaping of government priorities and not a thoughtless chopping exercise.

The budget also emphasized measures related to innovation and research. This focus was signalled widely in advance of the budget, but the approach taken differed from the norm of recent years. Productivity improvements in Canada have been much sought-after, but elusive as previous government initiatives like lower corporate taxation and tax credits failed to deliver on that promise. With this budget, the government has signalled that it is changing tack. In a “Back to the Future” kind of way, there appears to be a return to more direct government involvement and incentives for high-risk venture capital and business innovation. While this type of direct involvement was (and still is) derided as the government getting into the game of “picking winners and losers,” the initiatives proposed in the budget echo many of the suggestions that we heard from business and policy leaders during our most recent series of Honourable James A. Richardson Roundtables this past autumn.

Another recurrent theme was a continued focus on trade and accessing new markets. In a sense, the budget offered nothing new on the subject; it mostly just restated the government’s recent accomplishments and highlighted the various trade- and investment-related initiatives currently underway. Although there was no new money for trade (in fact, foreign diplomacy and aid received disproportionately heavy cuts in funding), this budget signals that international trade remains a high priority for this government.

There were also some policy issues on which, in our view, the budget was disappointing or disappointingly silent. As noted above, in spite of the fact that trade and market access are stated priorities of this government, financial support for foreign affairs and diplomacy was cut. In addition, the budget includes no significant new measures or financial support relating to environmental protection, conservation, curbing greenhouse gas emissions or renewable energy. There was also disappointing silence on the subject of a Canadian energy strategy. Finally, there were no significant new funds for urban or trade-related infrastructure. While the federal government has made significant investments in this area in recent years, there remains a large infrastructure deficit in many parts of the West.

As a concluding note, it seems appropriate to devote a final thought to bidding adieu to the much-maligned penny which will cease to be minted in April, and stop being distributed later this year. Over the years we’ve all complained about the space pennies take up, we’ve gotten into trouble in school for flicking them at classmates, we’ve thrown them in fountains, used them for ill-advised science experiments and we’ve refused to pick them up when they lie alone and half-forgotten on the street. And now they will be no more.

Goodnight sweet penny. No longer will you fool me into thinking I’m rich based on the thickness of my wallet. May flights of angels sing thee to thy rest.

By: Michael Holden, Senior Economist

On March 29^th, the Conservative government will bring forward what effectively amounts to its first budget since it won a majority in the House of Commons last spring. There are several reasons to expect this particular budget to be significant. For one, it will be the first delivered by the Conservatives free from the constraints of a minority Parliament. In addition, the budget is expected to include more specific details on how (and over what time period) the government plans to eliminate the deficit.

Finally, since the current government is early into its mandate, the budget provides an opportunity for it to set its agenda over the next several years and put its stamp on the future direction of the country. Governments in the past have frequently adopted more controversial policies early in their mandates so that voters have as long as possible to forgive and forget before the next election.

In a general sense, the expectations surrounding this budget are pretty clear. The government will take steps toward eliminating the deficit focusing heavily (or exclusively) on the expenditure side of the equation. No new taxes are expected, nor is there expected to be any rollback of previously-announced corporate tax cuts that kicked in this past January. There have also been broad hints about changes to Old Age Security (OAS) eligibility and a renewed focus on international trade and fostering innovation.

What is not known is the nature or the severity of the program spending cuts. We do know that since it was first elected in 2006, the current government has not exactly been “conservative.” Due in large part to its economic stimulus package in 2009, federal program spending has increased by 36.7% since the 2005-2006 fiscal year and the federal civil service has expanded by about 15.3%. Not including federal Crown corporations, there are more federal government employees today than even before the Jean Chretien Liberal government took the reins in the early 1990s.

With that in mind, there are a few things that the Canada West Foundation is anticipating in the budget.

Better-than-Expected Results in 2011-2012

In its last budget, the federal government projected a deficit of $32.3 billion for the 2011-2012 fiscal year. That figure was later amended to $31.0 billion in the government’s annual November fiscal update, as lower-than-expected program spending was more than enough to offset sluggish revenue growth and the addition of a $1.5-billion risk adjustment buffer to guard against the effects of global economic uncertainty on the bottom line.

Barring a major year-end spending spree in March, however, the actual deficit for the current fiscal year will almost certainly be much lower. The deficit was projected to decrease only slightly compared to last year (from $33.4 billion to $31.0 billion) but the government is well ahead of pace. Through the first three quarters of the year (April to December 2011), the federal deficit stands at $17.7 billion, a considerable improvement over the $27.4 billion deficit over the same period last year.

There are two directions the federal government could go with this increased fiscal flexibility. It could accelerate its deficit-elimination schedule and balance its books a year or two earlier than currently planned (in 2016-2017). Alternatively, it could use that flexibility to lessen the severity of anticipated cuts to program spending. Some combination of the two is also possible.

Prudent Economic Forecasts

On a related note, we look for the government to continue making its budget projections based on cautious economic and revenue growth assumptions.

During Jean Chretien’s tenure as Prime Minister, Finance Minister Paul Martin attracted some criticism because his economic- and revenue-growth forecasts were so conservative that the Liberal government regularly posted much better year-end budget balance figures than were initially projected in their budgets. For a few years this was a bit of a novelty as governments historically had tended to over-promise and under-deliver in their deficit-fighting efforts. By the end of the Chretien-Martin era, however, pundits were clamouring for more accurate budget forecasts, because year-end numbers were consistently so much better than budget forecasts.

Returning to this era of under-promising and over-delivering would not be such a bad thing. While worries over sovereign debt crises in Europe and the sluggish US economy have eased somewhat over the past six months, there remains a great deal of global economic uncertainty on the horizon. In this context, small-c conservative growth forecasts would be prudent. 

In addition, understated growth forecasts would allow the current government to capture one of the big advantages enjoyed by the Chretien/Martin approach to budgeting. By regularly underestimating revenue growth, the Liberal government of the time was able to avoid the pressure to increase spending that comes when governments announce that their fiscal situation is actually pretty good. The moment a government announces that it has billions of dollars left over after fulfilling its spending commitments, you can guarantee that there will be a clamour of voices with all sorts of ideas about how that money should be spent. This is not to say that many of those ideas are not worth supporting. Rather, it is extraordinarily difficult for a government to announce that it has excess revenues without at the same time creating enormous political pressure to spend those revenues or to decrease taxes accordingly. This can result in decisions being made on the fly rather than being carefully considered as part of a long-term plan.

Simplification of the Tax System

The Canada West Foundation has long argued in favour of a simpler tax system. The recent trend, at the federal level at least, has been for the addition of boutique tax credits aimed at specific segments of the electorate: tax credits allowing tradespeople to write off their expenses on tools; credits for arts and sports programs for children; employment tax credits and so on. Every year it seems that the forms get longer and more complex. We don’t suggest going to the simplified tax scheme proposed here, but an increase in transparency would be welcome.

A caveat to this statement is that we have no position on whether taxes should be higher or lower. Too often people get swept up in ideological debates which focus entirely on the tax side and ignore the expenditure side completely. It is important to remember that taxes are the means by which governments provide services to their citizens. All else being equal, we get what we pay for: lower taxes means fewer or less comprehensive government services and higher taxes mean the opposite. Now there are all sorts of arguments one could make about how efficiently governments use their revenues and about how much easier it is for government to grow than to contract. But in our view, the appropriate level of taxation is the lowest one possible which provides Canadians with the goods and services they want, while also allowing governments the policy flexibility to pursue appropriate social and economic objectives for the long-term prosperity of the country and also ensuring that Canada is an attractive place in which to do business. In other words, we need the taxes to afford what we want and need, not to blindly raise or lower those taxes without a specific, and compelling, reason for doing so.

Government Program Spending

The federal government has already stated that it will not touch transfers to the provinces as part of its move toward balancing the budget. The size (and growth rate) of federal transfers for health and social services has already been determined for the next decade or more. Similarly, the pool of funds for the equalization program is set to increase each year, tied to the growth of the national economy.  While we have some concerns about the specifics of these programs and some of the interprovincial equity issues that could result from the distribution of those funds, those concerns are not part of the budget discussion itself.

In terms of direct program spending, however, the federal government has already signalled that it intends to find billions of dollars in “savings” under its “deficit reduction action plan savings target.” What this means, exactly, is anyone’s guess at this point, but the specifics of this plan should be included in the forthcoming budget. What is clear, however, is that after years of rapid spending growth and a hiring spree that has seen the creation of more than 60,000 new federal government positions (including in the military) since 2004, there are cuts on the way.

Given the huge increase in federal government spending in recent years, there is certainly some room for modest fiscal retrenchment. There are, however, a few things we would not like to see. First of all, the budget should not take the easy way out and impose across-the-board cuts on departments. Doing so carries the risk of penalizing effective programs by providing them with fewer resources to accomplish their objectives, while allowing less effective or redundant programs to continue on. A more difficult, but ultimately more valuable, exercise would be to use program spending cuts as an opportunity to revisit past government programs and to refocus efforts on initiatives that are demonstrably effective at enhancing economic and social welfare in Canada. Second, the budget needs to walk a fine line between returning to fiscal balance on the one hand, and not undercutting the still-fragile economic recovery on the other. The Canadian economy grew at a relatively modest 2.0% in 2011. A dramatic cut in federal spending could further weaken the economic outlook for the current year.

A better approach would be for the government to back-end-load its spending cut commitments. This means that the government should set out a deficit-reduction plan that sees relatively modest cuts to program spending this year (and possibly next), allowing the economy time to find its footing. When conditions are more robust, the Canadian economy will be in a better position to absorb the impact of more severe cuts to federal spending.  

Environmental Review Process

It has been suggested in the lead up to the budget that the federal government is looking to streamline the environmental assessment process for resource development. While this move is guaranteed to spark outrage in some circles, we are cautiously optimistic. The Canada West Foundation supports the idea of a streamlined review process: one that eases the administrative burden on businesses and reduces the time it takes to get shovels in the ground on approved projects, subject to the condition that the standards to which businesses are held are not compromised as a result.

Many people believe that expediting the review process, or handing the responsibility to the provinces, will result in less due diligence or a patchwork of environmental standards across the country. Some will undoubtedly suggest that a shorter process is, in fact, a backdoor attempt to lower standards, skirt environmental regulations and run roughshod over due diligence.

Without detailed information on the specifics of the federal government proposal, we cannot comment on those anticipated criticisms. We look to the budget to provide some of that information. To be sure, laxer environmental standards are a risk if the spirit of the matter is violated, but we do not accept the view that fixing the review process will necessarily result in lower standards or that it represents an abdication of environmental stewardship on the part of Canadian governments. A longer review process does not make a better review process.

Michael Holden will be in Ottawa on budget day and will prepare a post-budget analysis. Media inquiries can be directed to Rachael Strathern, Communications Team Lead, at communication@cwf.ca or (403) 700-9535.  

By: Tom Carson, Director of the Manitoba Office

Manitobans head to the polls on Tuesday, October 4, 2011, and with only 169 days to go it is not surprising that the budget tabled on April 12 seemed designed both to benefit the largest number of interests and to create the least possible controversy.

On the revenue side, no increases are planned for major corporate or personal income taxes and expenditure increases will be sprinkled across many sectors, reaching a very broad public. These increases include the freezing of administrative costs for the regional health authorities and tying tuition increases to the consumer price index (CPI).

However, there was also some disappointment, especially for those who viewed the budget through a lens where the economy and our future spending ability is of preeminent importance. While the minister stated that overall expenditures were expected to rise by 2.3%, year over year, spending on core programs actually rose by 4.89%.

Going into the preparations for this budget, consultations generated a few hot points:

• The Business Council of Manitoba had what seemed to be an unprecedented recommendation; in recognition of the serious impact that Manitoba's infrastructure deficit has on the economy, the leaders of Manitoba's business community actually recommended a 1% increase in the provincial sales tax to be applied for a ten-year period and used only for infrastructure expenditures. This was seen as an opportunity for municipalities to deal with their infrastructure problems with a revenue source that actually grows with the economy.
• The government responded with a commitment to spend the equivalent of one point of the provincial sales tax on municipal infrastructure and public transit. This looks like a bigger commitment than it is. Rather than being incremental to current infrastructure spending, this commitment blends current grants for infrastructure and public transit. While blending both grants identifies a secure and growing source, for the City of Winnipeg it would represent an estimated 9% increase from funds they already receive. Winnipeg will benefit by having this increase funded from a growth stream, whereas previously approximately 50 to 60% was funded in this manner. Over time the value of that growth will become more obvious, however, it is not a substantial investment and will not contribute significantly to correcting the infrastructure deficit.
• Comparatively, Manitoba's universities have been both underfunded and, due to a decade-long tuition freeze which ended in 2009, prevented from using tuition increases as a means to help balance their books. The government has committed to increased grants of 5% over the next three years and has reinstituted a tuition freeze, although this time tying it to growth in the CPI. Although this commitment is not enough to bring them on par with the support received in most other provinces in Canada, it does at least begin to reflect the importance of universities to our provincial economies.
• For those hoping that the budget would reflect a major commitment to cut spending, the tone of the budget speech demonstrates that it was clearly not something the government wished to lead with. The publicly stated commitments to restraint are quite narrow—they are striving to negotiate a 0% increase for the general civil service, freeze discretionary salary and operating expenditures, maintain last year's reduction in ministerial salaries and carry on a freeze on salaries for members of the legislative assembly along with their staff. They will be attempting to freeze salaries for senior management in the regional health authorities and generally seeking ways to foster innovative, cost-effective services. (Government will likely also expect all public-sector employers to seek the same wage freeze—presenting an interesting dilemma for university administrators).
  
  

The question yet to be answered for Manitobans is whether the right policy choices are being made through the current budget. Were there alternatives which could have resulted in balancing the budget more quickly? If these choices were not made in this budget, will it be incumbent on the government formed after October's general election to initiate them?

It might be tempting to say that no government going into an election would choose to add 1% to the sales tax or to introduce themes of restraint and program redesign. However, Saskatchewan is also heading into an election in November of this year, and unlike Manitoba and most other provinces, has already posted a surplus. Both provinces saw greater revenues last year and both spent more than they had budgeted in 2010/11. Saskatchewan's revenues and expenditures have grown significantly more than Manitoba's, but their treatment of the budget challenge in 2011/12 is quite different despite the upcoming elections. While Saskatchewan plans to be spending 5.48% more than their printed estimates of last year, they will be spending 2.45% less than their actual previous year expenditures. And the untouchable—spending in the Department of Health will actually be reduced compared to the previous year.

Now, that would have raised eyebrows amongst those looking for more attention to the bottom line in Manitoba!

By: Jacques Marcil, Senior Economist

This is the season of budgets and baseball spring training. While there is no true link between the two, one could not help think of Alberta Finance minister Lloyd Snelgrove as a relief pitcher.

Snelgrove was brought in last month as an emergency caretaker minister of Finance in replacement of Ted Morton, who resigned to join the PC leadership race. (One of the worst-kept secrets in Alberta is that Morton essentially resigned because his views on government cost-cutting were too drastic for outgoing Premier Ed Stelmach’s taste.)

There were no real surprises in the February 24 Alberta budget. Usually, the absence of surprises is considered to be a positive sign. Is this the case here? Yes and no.

On the expense side, the 2010 approach is somewhat repeated: sustained financing for health, education and other “social” ministries, with modest cuts to the other ministries to offset this. This results in program spending increases of 0.5%, 1.3% and 3.1% over this year and the two following years.

On the revenue side, nothing much is done except some service fee increases. However, Snelgrove expects Alberta revenues to grow solidly on their own, reflecting very positive forecasts for economic growth and for natural resource royalties. The latter are expected to jump by 23% and 16% in 2012-13 and 2013-14 respectively. (This is not impossible, but who knows?)

As a result, the province’s deficit gets erased by 2013-14, one year later than originally planned. This delay is not bad in itself given the severity of the recession in Alberta. The problem is that the balancing act is accomplished by drawing down most of the Sustainability Fund—a meager $1.7B is left in it by that date, one-tenth of what was in the Fund in 2009-10.

So the Alberta government has little margin of maneuver and lots of hope hanging on energy price forecasts. Past experience has taught Albertans that those prices are full of surprises, positive and negative. We might have reached the point where Alberta taxpayers have had enough of this uncertainty.

You can’t have your cake and eat it too—Albertans have long enjoyed low taxes, but if they want to enjoy the same level of services as other parts of the country they will have to start considering other sources of revenue for their provincial government.

Energy royalties are nice but they are irregular and unpredictable. The province pays for most of the steadily-growing cost of its services using rollercoaster energy money. If Alberta needs to reform its tax system, it should do so. Taxes are not an ideological issue, they are a practical one. Decisions on tax policy should be fact-based, period.

To return to my baseball analogy (a very agreeable thought when the windchill factor is -36ºC outside), walks are “bad things” but even the best pitcher sometimes has to issue an intentional walk depending on the game situation. No one likes taxes, but sometimes we need them.

Given the unpredictability of Alberta politics (a misnomer until a few years ago), maybe now is not the time to start complex discussions on what size of government Albertans want, or about what taxes are needed for its proper functioning.

Thinking again about it, maybe it is the right time.

We’re right in the middle of budget season. Everywhere you look, provincial governments are killing trees and unveiling plans to tackle the deficits they inherited from the recession. While not all provinces were in the black before the recession hit, all are swimming in red ink now.

Saskatchewan brought its budget down earlier this week. I will leave it to others to analyze it in details. All you need to know is that things are tight and that just like the other provinces, Saskatchewan is trying to maintain core services while keeping its deficit under control. What I want to discuss today are the perils of forecasting.

After a few years of good economic times, the best in decades, Saskatchewan went through an economic and public finance drop in 2009. This made the 2010-2011 budget-making exercise somewhat embarrassing. The government had to acknowledge that some of the forecasts featured in the 2009-2010 budget were quite off the mark. Finance Minister Rod Gantefoer had made the classic budget mistake: taking wishes for realities.

Last year, some analysts’ forecasts for potash prices were very high. As I wrote in Against the Grain, my April 2009 report on Saskatchewan’s economy, “the forecast calls for more price growth on top of a potash price level that is already three times what it was in 2007, and nearly six times its level of the 15 previous years.” Instead of treating those as the upper limit of a potentially wide price range, the government took them as its basic scenario.

At least, you can give this to the government: it took those potash price forecasts as they were. When it came to forecasting real GDP growth however, the government averaged the private sector forecasts and added growth to them because they were… well… not high enough for its liking. “Similarly, and not coincidentally, the Province’s forecast of 2.1% real GDP growth in 2009 is well ahead of most private sector forecasts” is what I wrote then.

The rest of the story is well-known: in both potash and GDP’s case, the forecasts proved to be noticeably wrong and made it much harder to put this year’s budget together because last year’s revenues turned out to be well below what was expected.

Economic forecasting is not an easy job. (Hey – my real GDP forecast for Saskatchewan was too high as well at 0.7%, but luckily I managed to aim below the private sector average of 1.0%). To err is human, so let me ask this question: why not err on the side of caution? This is especially true in Saskatchewan, where nearly a third of the economy is directly at the mercy of the world commodity markets’ volatility.

Erring on the side of caution is better because there is only one drawback with being too prudent, and that is the embarrassment of riches that comes from a surplus that was not budgeted for. On the other hand, being too optimistic comes at a cost: deeper deficits and higher debt. Minister Gantefoer did not use a prudent approach last year even though he was fully aware of the global recession by then.

One could argue that if the prudent growth forecast is too low, then the government has no choice but to reduce spending or declare a deficit. I don’t see this as a problem, but rather as transparent public finance management. The forecast information should feed into the spending decisions, not the other way around.

Despite the fact that this year’s financial results are disappointing for Saskatchewan compared to last year’s expectations, they remain quite positive compared to the rest of Canada, where growth prospects are more slim and provincial finances in worse shape. Things are relatively good in Saskatchewan now, the best they’ve been in decades. Hopefully the other provinces will be so focused on their own economic recovery issues that they won’t notice this budgetary “oops” moment.

And by the way, in this year’s budget, the province’s growth forecast is a few notches below what the private sector says. Apparently, some lessons were learned.

Do you agree with government’s optimistic approach to forecasting? Share your thoughts below.

Posted By: Jacques Marcil

As noted by the Canada West Foundation CEO, Roger Gibbins, “(Prime Minister) Stephen Harper has floated the notion of Canada as a clean-energy super-power. That has a nice ring to it, but it implies there is a policy to get us there, but we don’t have that policy!”

Why don’t we have such a policy? Getting public policy just right is a tricky task at the best of times and with climate change it is particularly challenging.  Policy makers need the right tools and good information to help them tackle the issues and develop good policies that will realistically work.  Trying to formulate good policy without good research is like trying to build a house without a hammer.

Finding the Right Tools

On Tuesday, I had the opportunity to attend a panel discussion that took a closer look at climate change policy.  An event co-hosted by the Canada West Foundation (CWF), the Institute for Research on Public Policy (IRPP) and the Haskayne School of Business entitled: “The Economic Impact of Reducing CO2 Emissions: Regional Disparities and How To Mitigate Them”.  Reports were presented from the Pembina Institute, Canada West Foundation and IRPP on the issue of climate change and then the floor was opened up for Q&A.

I was encouraged to learn that there is good research going on to find the right tools that will help build climate change policy that might work for all regions in Canada.   In particular IRPP report by Tracy Snodden and Randall Wigle, “Clearing the Air on Federal and Provincial Climate Change Policy in Canada,” starts a good discussion of how a regional beneficial climate change policy could work.

Nuts and Bolts

The IRPP report considers that: a) in Canada both the federal and provincial governments share a responsibility for the environment but that current system of climate change in Canada is fragmented; b) while the environmental impact of each unit of reduced emissions is the same everywhere, the economic impact per unit is not consistent and; c) the US and its policies are an influencing factor.

Their proposal is a federal carbon tax with provincial revenue sharing of that tax revenue as an incentive to mitigate and offset the economic impact.

The idea has some merit, a federal carbon tax is:

• easily implementable;
• generates revenue which could go back to the provinces to reduce burden-sharing concerns tied to emissions reduction;
• increases efficiency; and
• is NOT off-putting to the US, helping Canadian industry to avoid border adjustments while having the ability to co-exist with a US cap and trade system.

Real World Planning

I believe the value in this report is twofold.  First, it presents a real plan to reduce emissions while considering the regional economic AND political impacts on the West.   It addresses issues of inequity which are often overlooked and makes a real attempt at mitigating potential disproportional harm.  It also takes into consideration the influence of our neighbour to the south and offers way which allows us to step up to the plate while not shooting ourselves in the foot in the process.  And second, this piece demonstrates good policy research.

If our policy-makers are going to develop good policy, they need nuanced research like this to help guide them.

Posted By: Candice Powley

The big news from yesterday’s budget includes the $49.2 billion deficit and the plan to reduce the red ink to just under $2 billion by 2014/15.

There are lots of other announcements and dollar figures in the budget document entitled “Leading the Way on Jobs and Growth.”

I stumbled across more than a few items, however, that don’t seem particularly “budgety.” For example, there is a short section on “modernizing Canada’s currency” on page 117 (the budget document is a whopping 451 pages). The section notes that new “bank notes will have increased security features and will be printed on a polymer material, which lasts significantly longer than the current cotton-based paper, thereby reducing production costs and the impact on the environment.” This sounds great, but does it belong in the budget document? There isn’t even a dollar amount attached to how much this will cost or save.

On the next page, there is a short section announcing a federal framework for credit unions that includes the following statement: “To promote the continued growth and competitiveness of the sector and enhance financial stability, the Government will introduce a legislative framework to enable credit unions to incorporate and continue their operations as federal entities.” As with the new bank notes, what does this have to do with how much money the government is taking in and spending?

We have bigger fish to fry than reducing the girth of the federal budget document, but in the name of doing more with less, maybe next time around the budget document will be leaner.

Posted By: Robert Roach

So here we are, deep in deficit again.  It’s easy for some to say that Canada’s deficit and debt remain quite manageable compared to those of other Western economies.  The problem is, the debt and the deficit could both have been considerably easier to deal with.  Mr. Flaherty’s government tinkered with the GST rate in 2006 and 2007 for reasons that were more political than economic, and now you can see the result.  If you know a single Canadian economist who thought that lowering the GST rate was a good idea, and if that economist doesn’t happen to be a Prime Minister, you are a very lucky person. Go buy a lottery ticket right away.

In fact, a simple calculation shows that if the GST rate had remained at 7% the government would have faced only four years of deficit instead of the seven (and counting) it now has to deal with. From 2006 to 2015, the government’s cumulated deficits will add $141 billion to the debt, $92 billion of which could have been avoided with an untouched 7% GST rate.  Do you know anyone who fundamentally modified their consumption habits because of those extra GST pennies they saved each day? If you do, you should get another lottery ticket.

Unfortunately, budgets are as much about politics as they are about finances.  The current budget is an example of such politics in motion.  If you put aside temporary stimulus spending, this government (with a small g) looks determined to gradually reduce the size of Government (with a big G) by shrinking both its revenue and expenses.  This represents an ideological shift as much as a financial one, hopefully with better outcomes than the changes to the GST.

Posted By: Jacques Marcil

Given that a prorogation of the House of Commons was required to put it together, yesterday’s 2010 federal budget was quite a disappointment.  Minister Flaherty’s document is thick with announcements related to the government’s much publicized “Economic Action Plan” but despite a thorough scan not much else is new in terms of economic policy.  The overall opus is 450-pages long but the complete list of genuinely new announcements could probably fit on a business card.

A large section of the budget consists in a report concerning the Action Plan, a report that the government was due to release anyway.  The bulk of it deals with infrastructure spending.  Of specific interest to the West, over this year and the next one or so (the time period is not clear), BC will get $1.6 billion, Alberta $1.0 billion, and Saskatchewan and Manitoba about $0.4 billion each for infrastructure.  These projects cover anything from new highway interchanges to new windows in some public buildings and are for the most part just barely getting started.

All this stimulus spending leaves the government with a $49.2 billion deficit in 2010-11. This marks a slight improvement in the government’s fiscal balance compared to last year as a result of revenues edging up this year due to the return to growth, but is still a deficit position.  If revenue projections are met, we will start to edge towards a surplus position over the short term as the stimulus money taps will shut down by the end of next fiscal year and the government will freeze its departmental operating spending starting this year.   Optimistically, Mr. Flaherty anticipates he will be able to balance the books sometime after 2014-15, the fiscal year marking the end of his forecasting horizon.  The back-to-surplus date may or may not be 2015-16.  He doesn’t know.

This deficit-fighting plan assumes that economic growth will average 2.8% over the next five years, which is a possible yet somewhat optimistic scenario.  During the deficit wars of the 1990s Paul Martin would average the private sector forecasts and then assume a bit less growth just in case. No such prudence for Mr. Flaherty.  The margin of error is therefore very thin: all it takes is one year of sub-par growth to derail the whole thing.

One solution the government said it would not use to bring the deficit under control is to reduce the provinces’ funding in areas such as equalization and health transfers.  In other words, there will be no shoveling of the federal deficit into the provinces’ yards.  All premiers will be happy to hear that, but they will keep asking for more money anyway.  That’s required by their job descriptions.

Note:

In a previous blog I mentioned that this year was a golden opportunity to simplify our personal income tax system.  The results are in, and I won’t bore the readers by showcasing in how many languages I can say the word “nothing.”

Posted By: Jacques Marcil