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Alexandre Laurin, associate director of research at the C.D. Howe Institute
Alexandre Laurin, associate director of research at the C.D. Howe Institute

Alexandre Laurin

2013 budget constrained by old goodies, new realities Add to ...

Faced with disappointing economic growth projections pushing tax revenues down, Finance Minister Jim Flaherty was left with very little room in this budget to balance the government’s books, let alone to bring in new bold spending initiatives or popular tax cuts.

Under these circumstances, the budget does a magnificent job of coming up with a few big-ticket items funded through reallocating funds already committed – the new Canada Job Grant for example – or simply continuing and republicizing existing programs, such as the $5-billion a year in transfers to municipal governments for infrastructure investments. About half of the modest $3.6-billion of new spending announcements over the next two years was already budgeted and committed.

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Mr. Flaherty probably wished his previous budgets hadn’t contained so much new spending spread around small initiatives targeted to specific groups. These constituencies now eat up precious fiscal room, and once in place, they are difficult to retire. The budget extends at least three “temporary” initiatives. The new plan continues the minister’s legacy of sprinkling low-value goodies for almost everyone, from sport enthusiasts and farmers to charitable donors and owners of Canadian-controlled small businesses. Some of these initiatives may well be desirable on their own, but a comprehensive strategy is lacking.

This budget was an opportunity to present a more sober near-term fiscal plan reaffirming the government’s commitment to end deficits quickly. The document spends many pages explaining to Canadians how their economy is faring much better than that of other G7 nations, which – aided by low inflation, pushing down spending on fiscal benefits to individuals – should have given it the capacity to accelerate the return to surpluses.

In particular, the budget does nothing to tackle the soaring cost of hiring a federal employee. From 1999 to 2012, this average compensation jumped from $57,000 to $114,000 – more than double business-sector growth, which ended the period with a much lower average cost of $49,000 per job. The Parliamentary Budget Officer expects the federal average to rise to $130,000 by 2015. Some of this growth is attributable to pension and other postretirement benefits, which now account for about a quarter of Ottawa’s personnel expenses. Ottawa needs to limit taxpayers’ exposure to the fast-growing cost of funding those benefits, by putting a fair cap on taxpayers’ contributions while sharing some of the risks with employees.

The plan for growth and prosperity centres on skills training through the new proposed Canada Job Grant, and apprenticeships. If successful, some of the gaps between employer needs and job seekers will be filled. However, Ottawa’s task will be complicated by its lack of control over labour market regulations that restrict small businesses’ ability to hire apprentices or barriers to labour mobility for regulated professions and skilled trades – both of which fall under provincial jurisdiction.

Greater prosperity requires investments – human and physical – and innovation. Canada’s national saving rate is too low to finance the investments needed for a more prosperous future. We need a comprehensive reform of the tax system. Such a reform would include a revenue-neutral shift away from economically-damaging taxation of personal and corporate incomes toward consumption, a standard tax allowance for corporate equity available across-the-board, and the elimination of ineffective tax preferences, which distort investment decisions and must necessarily be funded through higher tax rates.

Instead, the budget extends and creates new tax preferences, adding to an overly long list. One of those, the extended accelerated capital cost allowance for manufacturers, makes new investment cheaper as long as there are profits to tax. The question we should be asking is not whether industry-targeted measures such as this one are spurring investments, but whether resources are put to their best use to foster our long-term prosperity. To the government’s credit, the budget does get rid of a few targeted preferences, notably accelerated capital cost allowance for mining, and the credit for investment in labour-sponsored venture capital corporations. A good decision, since numerous studies have shown that better channels exist to support venture capital.

Overall, the 2013 budget should be well received by markets. Budgetary balance is projected based on reasonable assumptions and within the previously announced time frame. However, while Canada is in better shape than most of its main trading partners, fiscal consolidation must take place in a global economy characterized by continuing high government borrowing, which means too much can still go wrong. More prudence would have required a speedy return to a healthy balance sheet – fewer new goodies and greater tightening of Ottawa’s operational costs.

Alexandre Laurin is associate director of research at the C.D. Howe Institute.

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