Federal budget is more about the politics of seeking fourth term

The document Finance Minister Joe Oliver will deliver Tuesday is far more than a budget. Its message of tax cuts and balanced budgets will form the core of the Conservative Party's election campaign as it seeks a fourth term in power.

The budget's bottom line will also serve as the starting point for the platforms of the opposition parties. Any surplus shown by Ottawa can be used by the other parties this fall to promise new spending or tax cuts.

That's why the Conservatives have already used up most of the expected surplus, forcing the opposition into raising taxes if they want to promise more ambitious spending than the remaining surplus would allow.

WHAT TO EXPECT

Prime Minister Stephen Harper made the unusual move of announcing the budget's biggest measures nearly six months ago. Promoted as the "Family Tax Cut," the government is allowing parents with children under 18 to split their income for tax purposes for a maximum tax break of up to $2,000.

The government is also expanding the Universal Child Care Benefit to deliver an extra $60 a month per child to parents with kids under 6 and creating a new monthly payment of $60 for each child between 6 and 17.

The package of announcements will cost more than $5-billion per year, using up most of the $6.4-billion surplus for 2015-16 that Ottawa had projected in its 2014 budget.

"Unlike other budgets, this budget is likely to have a longer time frame," said Janice MacKinnon, a professor and former Saskatchewan finance minister who chairs Mr. Oliver's economic advisory council. "There could be announcements of initiatives that don't cost a lot this year, but have long-term costs."

Doubling of the annual contribution rate to Tax-Free Savings Accounts is expected to be in the budget as part of a seniors-friendly package that includes a softening of the withdrawal rules for Registered Retirement Income Funds.

The Federation of Canadian Municipalities has been pushing hard for $1-billion a year in new funding for public transit and there are signs the Conservatives will move in this direction.

The Conservatives will also likely include measures aimed at supporting the manufacturing sector, such as the extension of a program that lets businesses quickly write off the cost of capital investments.

THE POLITICAL PUSH

"This is a carefully crafted political document that's been years in the making," said Unifor economist Jim Stanford. "It's all organized around the symbolic triumph of a balanced budget."

By devoting most of the future surpluses to tax cuts, the Conservatives have essentially placed the opposition in a bind. Promising to govern in a substantively different way than the status quo will force the opposition parties to unravel at least some of the tax cuts that are now in place.

The Liberals and NDP have suggested they would reverse income splitting and the NDP plans to hike corporate taxes in part to pay for a new national daycare program. Both parties are suggesting they would spend far more than the Conservatives on infrastructure. Asking Canadians to potentially pay more tax for spending that may not benefit them directly could prove to be a hard sell.

"It was very clever – in a sort of Machiavellian sense – of trying to box in the opposition parties and force them to run on what the Tories will claim is a tax increase platform," said Mr. Stanford. "I wouldn't call not going ahead with a tax cut an increase in taxes. I think that's stretching it, but that's clearly their goal."

Tax cuts may not be as popular as Conservatives hope, though. A recent Nanos Research survey found that when Canadians are asked what Ottawa should do with a budget surplus, the most common answer was to spend money on infrastructure at 32 per cent. Only 14 per cent wanted tax cuts.

THE FISCAL REALITY

Mr. Oliver's Nov. 12 fiscal update forecast economic growth of 2.6 per cent in 2015, but now he is only counting on 2-per-cent growth because of the drop in oil prices. Bank of Canada Governor Stephen Poloz said growth will only be 1.9 per cent and has warned first-quarter figures will be "atrocious."

However, Mr. Poloz used the release of his April 15 Monetary Policy Report to highlight some positive signs on the horizon. The worst impacts of low oil may have peaked, he said, and the Canadian economy should soon start to see some of the positive economic impacts of lower energy costs.

"If the forecast is true, things will look improved as we go through the year," said Mr. Poloz.

Mr. Poloz said companies are "pretty upbeat" about the future and that Canadians are feeling better about the labour market.

Some economists were skeptical of the Bank's optimism.

"We wouldn't bet on this," said David Madani of Capital Economics. "We expect the oil shock to be larger and longer lasting."

A QUESTION OF BALANCE

No one doubts that the Conservative government will forecast a budget surplus for 2015-16, because the political promise has been unequivocal. There are many questions though as to how that forecast will be achieved.

The Parliamentary Budget Officer warned Friday that the government's approach to Employment Insurance revenues is "a concern" because Ottawa appears to be balancing the books by collecting more in EI premiums than is necessary to fund the benefits program.

There will be close scrutiny on Tuesday as to how the government records entries like the recent sale of GM shares and what adjustments it makes, if any, to the annual contingency fund.

Ottawa normally sets aside $3-billion a year for unforeseen events, but Mr. Oliver hasn't said whether that practice will be repeated. The C.D. Howe Institute recently said the contingency should be doubled to $6-billion, even if that means forecasting much smaller surpluses and making fewer promises.

"We are in a period of considerable uncertainty," said C.D. Howe president Bill Robson. "The political risks involved with presenting a budget that looks a little skinny are probably less serious than the political risks of actually missing your target and ending up in the red."