Even before Finance Minister Jim Flaherty gets to work Thursday on his top priority – slaying the $26-billion deficit by 2015 – it’s worth pointing out that he’s chasing a moving target.
The federal government’s current forecast is for a deficit of $26-billion in the fiscal year that ends this month. But Thursday’s budget will contain a new estimate, and based on what we already know about the first nine months, the deficit could come in much lower – perhaps $20-billion, according to an estimate by the Royal Bank of Canada.
That, however, was before Atomic Energy of Canada Ltd., a federal Crown corporation, revealed Wednesday that its liability for cleaning up old waste sites just grew by $2.4-billion – a toll the company said would hit the government’s bottom line in 2012-13.
The final deficit figure for 2012-13 won’t be know until the fall, when the budget is a distant memory.
WHAT TO CUT?
Funding new priorities and coping with weaker tax revenues will inevitably force the Finance Minister to make some additional cuts – if he wants to stay on target for eliminating the deficit.
Mr. Flaherty isn’t getting much of an assist from the economy.
The Canadian economy grew at roughly three per cent in 2011 and two per cent last year. Thursday’s budget will show expected growth of just 1.6 per cent, based on an average of private-sector forecasts. At this time last year, Mr. Flaherty was betting on 2.4-per-cent growth.
Less growth, of course, means lower tax revenue. Ottawa must make up what Finance officials say is a $2.1-billion shortfall in revenue for the coming fiscal year.
That reality, combined with the commitment to slay the deficit, severely limits what Mr. Flaherty can do on the spending side.
So expect a modest budget masquerading as an action budget.
Last year’s budget put in motion cuts to program spending expected to total $5.2-billion a year by 2014-15. Most of that chopping still lies ahead.
Treasury Board President Tony Clement unveiled a plan last month to slash $4.9-billion in discretionary spending in 2013-14, with the $20-billion-a-year defence budget bearing the brunt of cuts. Other departments facing big hits are the Department of Foreign Affairs and International Trade, Environment Canada, Transport Canada, the Canadian International Development Agency, Canadian Border Services and Health Canada.
One symbolic item that could take a hit is the ability of federal civil servants to bank their unused sick days. The perk has become a sensitive issue among voters because it’s virtually non-existent in the private sector.
Close corporate loopholes
Shutting down corporate loopholes is a politically expedient way for governments to deal with a budget problem.
The tricky part is that one company’s loophole is another company’s vital lifeline. Just witness the furor over last year’s cuts to the R&D tax credit regime – still among the richest in the world.
That doesn’t mean there aren’t plenty of places to chop. Jack Mintz, chairman of the University of Calgary’s School of Public Policy and a favourite of the Harper government, has suggested Ottawa could save nearly $5-billion a year by eliminating such breaks as labour sponsored venture capital corporations, flow-through shares used by resource companies, Atlantic Canada investment tax credits, film tax credits and preferential small-business-tax rates for credit unions and small businesses.
Mr. Mintz says Ottawa could save billions more by eliminating subsidies to businesses.
Mr. Flaherty has also talked about giving the Canada Revenue Agency more resources to crack down on tax cheats. The budget could show a projected revenue boost from these efforts.
Defer capital spending
Got a cash flow problem at home? You put off that new car or kitchen renovation.
Ottawa is similarly hoping to save money on big capital expenditures. It could do that, for example, by deferring spending on some infrastructure projects or new ships and fighter aircraft.
But that just kicks the can down the road a bit.
Mr. Flaherty has said he won’t touch the the roughly $130-billion a year in transfers to individuals and the provinces.
But that’s because Ottawa has already offloaded one significant future headache to the provinces by capping health-care transfers. In 2011, the federal government capped the annual increase in transfers at six per cent a year until 2016-17, and will link all increases thereafter to the rate of economic growth. Unfortunately, with the population aging, health-care costs are expected to grow much more rapidly than the economy.
WHAT TO KEEP?
Jim Flaherty’s fiscal bind won’t stop him from throwing new money at a clutch of government priorities. The Finance Minister has said he is prepared to invest in three key areas – easing a chronic skills mismatch, renewing funding for municipal infrastructure and reviving the hard-hit manufacturing sector.
One priority that’s likely to be spared the restraint seen elsewhere in the budget is urban infrastructure. Mr. Flaherty is expected to renew programs that currently transfer roughly $4.25-billion a year to municipalities.
Municipalities are looking for nearly $7-billion a year for 20 years. From crumbling bridges in Montreal, sinkholes in Ottawa and inadequate public transit in Toronto, the need is great.
But Mr. Flaherty is apparently only willing to commit to about $5-billion a year for a shorter time period, perhaps a decade.
The country’s skills problem has become an open wound in the Conservative caucus. Ontario MPs complain about the thousands of unemployed factory workers in places such as London, where Caterpillar shuttered a locomotive plant last year, not getting the training they need to find jobs.
Meanwhile, MPs from the West say thousands of jobs for skilled welders, heavy equipment mechanics and the like are going begging in their communities. By some estimates, there are 260,000 job vacancies across the country, in spite of more than a million unemployed workers
Mr. Flaherty is expected to unveil a national labour-development strategy. Business groups say the key elements will be a cross-Canada awareness campaign, efforts to improve the mobility and recognition of skilled trades credentials between provinces, an extension of tax credits for apprenticeships and new funds for companies that invest in worker training.
Ottawa wants better accountability for the roughly $2.5-billion a year it gives the provinces for skills-training programs. The government is also mulling recommendations that it require companies that win big government contracts to offer their workers apprenticeships. The Canadian Federation of Independent Business has also lobbied hard to extend a small business hiring credit.
The factory sector is in trouble, particularly in Ontario. Since last summer, Canadian factory output has fallen four per cent, a victim of weak global demand and the high dollar.
Mr. Flaherty has promised to address the problem in the budget. So expect some modest efforts to help manufacturers become more innovative and globally competitive.
Ottawa has taken a lot of heat over its decision in last year’s budget to make its $3.5-billion research-and-development tax credit program less generous. The Canadian Manufacturers and Exporters organization estimates the changes will cost businesses $750-million a year.
At the time, the government pledged to plow the savings into more targeted programs to spur innovation.
The government is unlikely to backtrack on R&D tax credits. But to ease the pain, Mr. Flaherty is exploring several options, including new incentives to help Canadian companies secure global product mandates as well as the creation of a technology-development fund to help companies commercialize innovations, possibly administered by the National Research Council.
Ottawa is also expected to extend the accelerated capital cost allowance until at least the end of 2015, which allows manufacturers to lower their taxes through faster writeoffs of machinery and equipment investments.
BY THE NUMBERS
$55.6-billion: The Harper government’s highest deficit, in 2009-10. After its first election victory, the government posted two years of budget surpluses before the global recession hit.
$26-billion: Ottawa’s current forecast for this fiscal year, which will be revised in Thursday’s budget.
$0: Finance Minister Jim Flaherty has set 2015 as the target for a balanced budget. In his fiscal update on Nov. 13, he said the deficit wouldn’t be eliminated until 2016-17, but three days later Prime Minister Stephen Harper said he wanted the books balanced before the next election, which is scheduled for Oct. 19, 2015.