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A reporter holds a copy of the federal budget as he waits for Minister of Finance Jim Flaherty, to speak during a news conference prior to delivering the budget in the House of Commons on Parliament Hill on Tuesday, March 22. (Adrian Wyld/Adrian Wyld/The Canadian Press)
A reporter holds a copy of the federal budget as he waits for Minister of Finance Jim Flaherty, to speak during a news conference prior to delivering the budget in the House of Commons on Parliament Hill on Tuesday, March 22. (Adrian Wyld/Adrian Wyld/The Canadian Press)

Stephen Gordon

A 'boutique' budget that's difficult to measure Add to ...

It was widely expected - and widely recommended - that the government undertake very little in the way of a change in the fiscal stance of the federal government for 2011-12. The recovery is well under way, so there was no reason to extend the two-year stimulus program. But since the economy is still expected to operate below capacity for the next two years, neither is it the time for an austerity program of deficit reduction.

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So it is not a criticism to note that there is really not much in the way of new policy initiatives in this budget. All of the major tax rates - personal income, corporate income and the GST - are left alone.





The government has done its best to dispel this impression: the budget documents list page after page of new measures addressed at various problems and client groups. But the actual amount of money involved is very small. At $300-million, the increase in the Guaranteed Income Supplement is one of the more expensive of the new measures - but that works out to just over 0.1 per cent of projected 2011-12 expenditures. Put together, the whole list works out to less than 1 per cent of total spending.





Given the scale of the proposals, evaluating their economic effects is an exercise that is difficult to motivate. Each announcement is designed to benefit a specific target that is too small to have measurable effects -- good or bad -- on anyone else.





The real problem is the outlook in the next few years. On the revenue side, GST and corporate income tax revenues are expected to remain at a stable share of GDP: the losses generated by cuts to the CIT rate are projected to be offset by the closing of tax loopholes. And since personal income tax system is progressive, PIT revenues as a share of GDP are expected to increase as real incomes increase.





As noted here, most of the federal government's spending consists of writing cheques to persons, to governments and to bondholders, and cuts to these items have been ruled out. The projected decline of spending as a share of GDP is due entirely to the announced freeze on program spending. This decline - along with the increase in PIT revenues is projected to eliminate the deficit in the next three of four years.



This scenario seems implausibly optimistic.



Firstly, even though the Conservatives have made essentially no changes to PIT rates, revenues as a share of GDP remained stable before the recession. As Economy Lab contributor Kevin Milligan notes, the Conservatives' penchant for small, targeted personal income tax credits has had the effect of cancelling out the revenue increases that would have otherwise been generated by the strong economic growth of the pre-recession years.



The revenue projection is plausible; the idea that the government will kick the boutique tax cut habit is not. On the expenditure side, some spending cuts - or 'savings', as the budget documents refer to them - have been identified as well as goals for the future. But the political challenges of implementing a nominal spending freeze on operating costs over a period of three or four years are formidable, to say the least.



This year's budget does little in a year when doing little is probably the right decision. The real test will be in the next two or three years.





Stephen Gordon is a professor of economics at Laval University in Quebec City and a fellow of the Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE). He is a regular contributor to Economy Lab and also maintains the economics blog Worthwhile Canadian Initiative.

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