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Prime Minister Stephen Harper (R) and Finance Minister Jim Flaherty (L) walk to the House of Commons to deliver the budget on Parliament Hill in Ottawa. (Dave Chan for The Globe and Mail/Dave Chan for The Globe and Mail)
Prime Minister Stephen Harper (R) and Finance Minister Jim Flaherty (L) walk to the House of Commons to deliver the budget on Parliament Hill in Ottawa. (Dave Chan for The Globe and Mail/Dave Chan for The Globe and Mail)

Globe editorial

A prudent, conservative budget from Harper and Flaherty Add to ...

In their 2012 budget, the federal Conservatives have largely lived up to expectations – and their promises – of limited government, though they could have gone farther, given this is their first budget with a full mandate. There is little in the way of decentralization by any abandonment of constitutional powers; this is not the hollowing out predicted in left-leaning jeremiads.

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The budget presented on Thursday by Jim Flaherty, the Minister of Finance, constrains the federal government by substantial, but not drastic, department-by-department spending restraints – which will inevitably result in a diminished level of services. Sensibly, these are not across-the-board reductions; central agencies such as the Privy Council Office will undergo proportionately larger economies, while Aboriginal Affairs and Northern Development – a needy portfolio – comes off comparatively lightly.

But the greater back-office efficiencies and reduced red tape that the budget promises will not suffice by themselves to yield the continuing cuts of $5.2-billion a year in program spending. The ending of 19,200 government jobs, though mostly through attrition, will doubtless hit the economies of Ottawa and Gatineau, but it is not a ruthless purge.

The eager pursuit of almost bewilderingly numerous foreign trade agreements is one major exception to the theme of a reduced, or more focused, role for the federal government. This is entirely in accord with the constitutional division of legislative powers. In modern times, however, complex trade treaties have a large effect on subnational governments, and the Harper government has been doing a good job of involving the provinces in trade negotiations.

Trade is not strictly speaking a budget topic, but it appropriately figures prominently in the budget presentation, which is also an exposition of economic policy. The opening up of much larger markets for Canadian goods, services and investments may well do much more to improve Canada’s lagging productivity growth than detailed policies designed to promote technological change.

The other area of economic activism is research and development. Clearly, the scientific research and experimental development program – a combination of a tax deduction and credit – has not reversed Canada’s productivity problem. The budget partly adopts the recommendations of the Jenkins panel, which reviewed the SR&ED program, and reduces its impact.

Tax incentives, however, have a certain degree of neutrality. An alternative set of policies has the understandably pejorative name of “picking winners” – a government’s substitution of its own business judgment for that of the markets. The budget proposes a greater amount of direct support for firms that are believed likely to engender a more innovative business culture in Canada. Moreover, the government will spend $400-million on venture capital funds, even if these are to be led by the private sector.

Here, the government will need to struggle against temptations to favouritism, to which no political party is immune. The same is true of the budget’s proposed preference in government procurement decisions for small and middle-sized companies that are judged to be especially innovative. Procurement is always an area full of pitfalls.

These policies are intended to be temporary, in the hope of bringing about a new technological takeoff in Canada. In the meantime, however, they could drag the Conservatives down into a morass of apparent patronage, notwithstanding the best of intentions.

Most of the main elements of the 2012 budget are good. The two-year deferral of the Old Age Security for those now below the age of 54 is a fair and reasonable adaptation to an era of greater longevity and mostly prolonged health – the much spoken-of aging population does not mean an ever-feebler Canadian demographic, like the Struldbrugs in Swift’s book Gulliver’s Travels. Likewise, the reform of public-sector pensions, by higher employee contributions and a normal retirement age, will before long greatly relieve strains on the public purse.

Mr. Harper and Mr. Flaherty can, and do, truthfully say that the federal government’s finances are on track. A small surplus is expected in 2015-2016, and the small deficit for the previous year may magically metamorphose itself into balance. The projections for 2016-2017 plausibly show a return to wholesome pre-recession debt-to-GDP and spending-to-GDP ratios.

Like its predecessors, this government has not solved the conundrum of the country’s overreliance on natural resources and its comparative deficit in entrepreneurship. At any rate, Ottawa’s books of account are headed in the right direction. This is why the Conservatives were elected, to prudently manage public finances in a tumultuous time. In the end, it is up to Canadian firms and individuals to make this a more innovative country.

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