By: Michael Holden, Senior Economist
On March 29th, 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 firstname.lastname@example.org or (403) 700-9535.