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Karim Bardeesy

Deficit tamer? Six sleights of hand Add to ...

Today's budget includes a number of tricks that Jim Flaherty will never betray openly, but that can be sniffed out in its graphs and charts. They range from acts of extreme budgetary and lexical dexterity to the digging of remote pits, where the bad news - at a time and place to be determined - will ultimately be buried. And they are critical to understanding the credibility of the government's ambitions to tame the deficit.

1. Program spending: This is one of those potential pits. The government says total spending on programs will fall by $7.8-billion in 2011-12, as stimulus spending ends. Spending won't reach today's levels till 2013-14.

Think about that in the context of the overall economy and the government's other commitments: in particular, no cuts to "major" transfers to people or provinces, which account for around half of federal spending. Departments will have to cut at least 1.5 per cent in their own average spending, because their budgets are being flat-lined while wage growth for federal public servants will average 1.5 per cent.

When you build in inflation increases, the pain will be felt much deeper in whatever direct federal programs get cut. And "non-major" transfers to people and provinces include programs such as farm supports and student financial assistance - if these are cut, expect Parliament Hill to be overrun by the thousands.

Understand, too, that governments almost always overshoot their program spending projections, and they almost never succeed in bringing in an absolute cut. Mike Harris's Tories cut program spending in one year in Ontario in the late 1990s, at the cost of considerable public upheaval, with education and welfare spending bearing the brunt; the federal Liberals also cut program spending when Paul Martin was finance minister, but mostly by cutting transfers to provinces.

This budget includes some examples of savings already realized, but compared to the challenge the government has set for itself, these are small. The government has to throw into the maw programs with constituencies ready to protect them, but has given no indication which ones are at risk. Previous cuts to small programs, such as arts and women's groups, caused a furor in previous years. Gird for more battles.

2. When more money is less money, and less is more: Even where the government says it's spending more, it may actually be spending less. That's because inflation will eat into any announced increases.

A good example is federal research funding. There's $13-million more for the Natural Science and Engineering Research Council, $16-million more for the Canadian Institutes for Health Research, $3-million more the Social Sciences and Humanities Research Council.

Good news, right? Not really. SSHRC's base grant is about $355-million. After you factor in inflation, it and the other granting councils mentioned will be flat-lined or cut.

On the flip side, to show its fiscal credentials, the government takes credit for "cuts" that are actually increases. The biggest evidence of this is in defence spending, which will increase, and international spending, which will see a $364-million increase in 2010-11.

But for wonks eager enough to turn to page 164 of the budget, they'll see the government is taking credit for $7-billion for the "savings" realized under these two items - because planned increases are not going ahead.

This won't stop complaints that cuts are being made, especially from those who will argue that Canada will be restricting its ability to play a meaningful role in world affairs.

(Mr. Flaherty is even taking credit for ending stimulus spending on time - perhaps in an attempt to draw a contrast with the Liberal Party, which Conservatives hope Canadians will view as unreconstructed spendthrifts.)

3. Other annual budgetary miracles: It wouldn't be an "austerity" budget without a plan to close tax loopholes and get more savings by reviewing programs. The plan's ambitions for this are relatively modest, compared to other deficit-laden governments: $3.8-billion over six years. But this comes on top of those planned program savings.

4. Your taxes: Mr. Flaherty promises no new taxes in this budget. But beginning in 2011, employed Canadians could still be keeping less of every paycheque. That's when the government's freeze on Employment Insurance premiums expires, and everything in the budget papers indicates that the Canadian Employment Insurance Financing Board will increase premiums by the maximum allowable amount - an additional 15 cents on every $100 worth of insurable earnings. (The current rate is $1.73 per $100.)

You can tell this is the likely scenario by looking at the government's projection for total EI revenues. They'll go up 13 per cent in each of the next three years, netting the government $15-billion in new revenues. Even a large decline in unemployment leading to more premium payments can't generate that much in new revenue on its own.

If you consider an EI premium hike to be a tax increase, well, that portion of your taxes will go up in 2011.

5. Total revenues: The government's assumptions around what economic growth will be (and other factors such as exchange and interest rates) and the resulting tax revenues are actually fairly prudent - not intentionally suppressed, as in the Paul Martin years, in a way that made every budget look like an economic miracle, but neither so miraculous that the government is depending on growth alone to return to balance.

Thankfully, Mr. Flaherty is not assuming that economic growth alone will bring the budget back to balance, as he appeared to be doing in the previous months. Growth makes up just over half of the return to balance.

A 2008-09-style Great Depression, of course, would sink even moderate growth assumptions.

The one area to watch here, as every year, is corporate tax revenue. The government assumes revenues from corporate income tax will increase from $22.3-billion in 2009-10 to $28.9-billion in 2010-11. But companies that have been unprofitable in recent years can often use the tax system to defray taxes on profits they may be making in the coming years.

6. One final trick: Oh, and by the way, this budget doesn't plan a return to balanced budgets, as it turns out. There's still a $1.8-billion deficit forecast for 2014-15. Not that we should slavish follow government projections going out five years, but it is intriguing that even the budgetary alchemy at the Department of Finance couldn't produce a balanced budget for the last year of its plan.

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