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Finance Minister Jim Flaherty, left, is congratulated by Prime Minister Stephen Harper on Tuesday after delivering the government's budget speech. (Sean Kilpatrick/Sean Kilpatrick/The Canadian Press)
Finance Minister Jim Flaherty, left, is congratulated by Prime Minister Stephen Harper on Tuesday after delivering the government's budget speech. (Sean Kilpatrick/Sean Kilpatrick/The Canadian Press)

Economy Lab

Budget's hidden math adds up to big cuts down the road Add to ...

Armine Yalnizyan is a senior economist with the Canadian Centre for Policy Alternatives



There was much to distract the eye in the latest federal budget, but the thing that caught my attention was the long-term fiscal plan: It looked like déjà vu all over again.

The fiscal plan laid out by Stephen Harper's government envisions a surplus budget by 2015-16 and gets there primarily by cutting federal program spending. As a share of GDP it falls dramatically, from 16 per cent in 2009-10 to 12.9 per cent in 2015-16.

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The only other time this has happened in Canada's economic history - except for demobilizing the economy after the Second World War - was when former Finance Minister Paul Martin tabled his infamous 1995 budget, a budget that recast fiscal federalism and retrenched the welfare state.

Mr. Martin's fiscal plan relied on highly contested cuts to shrink federal spending from 16 per cent of GDP in 1994-95 to 12.7 per cent in 1998-99 - almost identical to what the Harper budget is now proposing. It fell further, to 12.1 per cent by 2000, largely because of extraordinary growth in the economy.

The difference between then and now is that: a) Mr. Harper has not laid out which public programs, specifically, will be cut; b) a tumultuous and fragile global economic context means the robust economic growth that Martin's budget bottom line enjoyed in the late 1990s is not likely in the cards for the next few years; and c) the Budget Plan itself makes clear the government forecast underestimates the scale of cutbacks to come - which means an even bigger poison pill is on the way.

That last point is an important consideration, since Canada seems headed for an election. There are two things to look out for.

First, officials in the budget lockup clarified that transfers to the provinces and territories for health care and social programs in the spending outlook for 2015-16 rely on a stay-the-course assumption. But the health accord runs out in 2013-14, when the cash transfer reaches $30.3-billion, and the Conservatives have already made clear they will not continue to automatically increase the transfer by 6 per cent a year. How much will be saved by slowing down how much gets sent to the provinces and territories?

Secondly, the government's Strategic Program Review provides over $6-billion in spending reductions over the next few years, but the budget plan announced a new review process that will cut at least another $11-billion in departmental spending, overall, in the same period. These amounts are not included in the spending outlook.

The process for attaining these cuts is more centralized and politicized than Strategic Review, taking place under the guidance of soon to be announced sub-committee of the Cabinet (with external experts to be appointed by the Prime Minister in the near future).

Given Mr. Harper's costly commitment to increasing Canada's military might, putting more people behind bars for longer, and cutting taxes further, there are dramatic spending cuts on the horizon for many federal programs, particularly social programs - it's the only way he'll be able to pay for his priorities.

Therein lies the poison pill.

If this budget plan is really the Conservative election platform, it's a plan worthy of debate.



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