Since Jim Flaherty became federal Finance Minister in 2006, circumstances have forced a series of budget improvisations. The 2008 financial crisis and the slump in 2009 put the minority Conservative government in lend-and-spend mode, and the fiscal aftermath and the continuing need to appease multiple interests have shaped Ottawa’s fiscal plans ever since. With the economy on the mend and a majority government in a position to get things done, expectations were high that the 2012 budget would chart a new course.
The budget does contain some key initiatives, with at least one – the changes to seniors’ income supports – being transformational. But the sheer volume of commitments, from regulation to international trade to rural broadband, gives it a grab-bag feel. Ottawa still needs a clearer statement of its priorities for stewarding growth in Canada’s economy and living standards.
The changes to seniors’ benefits – starting to raise eligibility ages for Old Age Security, the Guaranteed Income Supplement and the Allowance in a decade’s time, and letting OAS recipients delay their benefits in return for richer payments in 2013 – are fundamental changes. They will reinforce the trend toward later retirement by baby boomers, and help protect the living standards of today’s children from slower growth in the economy and the tax base. The long wait for higher eligibility ages will raise tension over fairness, but the government rightly points out that the direction – similar to what most other developed democracies are doing already – simply fits the reality of longer and healthier lives.
For some observers, the budget’s headline of $5.2-billion cut in annual operating costs looks radical. Granted, it would put real spending per Canadian by federal departments and Crown corporations 15 per cent lower by 2015 than it was last year – a 4 per cent fall each year. As the budget plan itself stresses, however, these reductions are much smaller than those Paul Martin presided over in the late 1990s – and much smaller than the increase in Ottawa’s operating costs that has occurred since then.
That increase was huge. Growth in federal non-uniformed employment outpaced growth in Canada’s population by 20 percentage points from 2000 to 2011, while compensation per employee jumped 76 per cent, from about $60,000 to over $105,000 – almost double the growth in average compensation throughout the country, which ended the period at only $50,000. How far the budget will roll these costs back depends largely on what happens to another budget proposal that provoked immediate excitement: equal employee contributions to federal workers’ pension plans.
This is an important move – indeed, the C.D. Howe Institute has recommended it – and these plans are so expensive that it could materially help Ottawa’s bottom line. But the budget hardly addressed – except by proposing to raise the normal age of retirement to 65 for new employees, most of whom will not retire for decades – the key flaw in these plans: that they make promises so rich that doubling, tripling, even quadrupling employee contributions would still not fund them adequately.
Unless Ottawa limits their benefits to what the saving actually going into them can support, taxpayers – most of whom can only save 18 per cent of pensionable income in their plans, about half of what federal employee pensions are worth – will have to bail these plans out. That exposure currently stands at about $250-billion and is rising. Most egregious was that the budget explicitly left MP pensions – the most generous and worst funded of all – untouched. This is more than an opportunity missed: It deprives the government of moral authority it needs to lead the changes, and will make the next steps harder.
Amid the welter of other initiatives and announcements, there was much to like. The announcement of an employment subsidy to reservists is welcome. The changes to employment insurance are in the right direction. The budget proposes modest improvements in tax neutrality and tax administration. It even commits, at long last, to raise Canada’s miserly limits on duty-free imports by travellers.
But it didn’t stop there. It added to a roster of regional development agencies that now offer corporate welfare to every square inch of the country. It further tilted subsidies to research and development to small companies, despite growing evidence that commercialization and growth to mid-size and beyond are where Canada’s innovation problems lie. It commits yet more government money to venture capital models that have failed. Yes, phasing out the penny will save money – but packing all these initiatives in one cover does not make them a coherent strategy to support Canada’s economy.
The 2012 federal budget deserves a passing grade. It brings projected budget surpluses a year closer, its economic assumptions are reasonable and its implementation will help clean up the mess left by the crisis and the slump. Its one transformational initiative – changes to seniors’ benefits – will benefit Canada for decades to come.
When it comes to strategy, however, the budget’s vision is blurred. The time for reactive policies and sprinkling goodies for every constituency has passed. The 2013 budget needs fewer pages, loftier goals and more focus.
William Robson is president and CEO of the C.D. Howe Institute. Alexandre Laurin is associate director of research.