The Conservative government has set the stage to erase the federal deficit ahead of schedule with a budget that pushes off billions in defence spending, hikes taxes on cigarettes and keeps new spending low.
Finance Minister Jim Flaherty's budget, tabled on Tuesday, forecasts a $2.9-billion deficit for the upcoming fiscal year – but that deficit only exists because Ottawa is setting aside $3-billion in case of unexpected emergencies. On top of that reserve, the budget signals Ottawa will move quickly to unload its remaining shares in General Motors, which would pad Ottawa's bottom line with billions more.
The figures suggest that by the time of the fall fiscal update, Ottawa will be in a position to beat their own projections and announce an early surplus before the 2015 budget, which is expected to include new spending and tax cuts ahead of the federal election.
Tuesday's budget includes a range of modest measures that respond to various political controversies that have dogged the Tories' legislative agenda, including barring suspended senators from earning pension benefits, proposing preferential hiring for veterans and increasing the number of food inspectors. It promises infrastructure spending, including $378-million for bridge repairs in Montreal and more than $450-million for a new span between Detroit and Windsor, as well as millions for postsecondary research and apprenticeship training.
Mr. Flaherty said he chose not to declare victory now because the cushion for risk has been needed in the past. This year, for instance, Ottawa spent most of its reserve on disaster relief after flooding in Alberta and the derailment in Lac-Mégantic. "I never wanted to force a balanced budget," he said. "I prefer a nice, clean surplus next year."
Glen Hodgson, chief economist of the Conference Board of Canada, says it is clear Ottawa will beat its current projections. "They've set themselves up maybe to declare victory a year early," he said.
"I can well imagine Mr. Flaherty standing up in the House in the fall. ... and he can announce at that point that they've balanced the books."
Public servants will make a significant contribution to Ottawa's return to balance as Ottawa plans to make current and future government retirees pay 50 per cent – up from 25 per cent – of the cost of the Public Service Health Plan. The move will provide a $7.4-billion improvement to the federal bottom line over six years.
The public-service changes account for the largest boost to Ottawa's fiscal projections in the 2014 budget, followed by a $3.2-billion increase over six years from higher tobacco taxes and a $3.1-billion move to delay some National Defence capital spending from this year to 2016-17. Closing tax loopholes and tackling offshore tax avoidance will raise an additional $1.7-billion over six years.
The budget announced an immediate increase in tobacco taxes, which will raise the excise tax on a carton of 200 cigarettes from $17.00 to $21.03. It also announced $91.7-million over five years to help the RCMP fight contraband tobacco.
One of the most contentious aspects of the budget is language that suggests Ottawa will go it alone on the Canada Jobs Grant – a centrepiece of last year's budget that has been an irritant to federal-provincial relations – as of April 1, if no deal with the provinces is reached by then. It marks the first official response from Ottawa since the provinces delivered a counter-proposal that asked for the start date to be pushed back to the fall.
The provinces have objected to the fact that Ottawa plans on paying for most of the grant – which provides up to $15,000 for training for individuals who qualify – by cutting an existing $500-million transfer to the provinces to fund training for vulnerable groups including aboriginals, people with disabilities, immigrants, youth and older workers.
The 2014 budget offers no new money towards Jobs Grant, but announces new training programs that will be offered directly by Ottawa, including an expansion of the Canada Student Loans program to cover apprenticeships in Red Seal trades.
While the 2014 budget signals Ottawa's plans to sell its shares in General Motors – a move that is estimated to raise nearly $4-billion at current share prices – it also sets aside significant new money toward investment in Canada's auto sector. The budget adds $500-million over two years to the Automotive Innovation Fund, a move that comes as Chrysler Group LLC is asking for hundreds of millions in support from Ottawa and Ontario toward a proposed expansion of its mini-van assembly plant in Windsor, Ont.
The new budget money also comes as Ontario is calling on Ottawa to do more to protect the auto sector in light of free-trade negotiations with South Korea, which appear to be nearing a conclusion. Domestic auto makers are strongly opposed to the trade deal, warning it will flood the Canadian market with cheaper South Korean vehicles with little reciprocal benefit.
The budget eliminates a hiring credit for small business, which was meant to help offset the costs of employment-insurance premiums for small business. It also outlines plans to keep EI premiums at higher levels than necessary to cover costs between 2015-16 and 2017-18, a move that raises $13.7-billion in additional revenue over three years.
Dan Kelly, the President of the Canadian Federation of Independent Business, said he's pleased to see changes to public-sector benefits but is disappointed the hiring credit was ended. He said his organization will be pushing Ottawa to lower EI-premium rates ahead of the current schedule.
"We're going to be aggressively pushing them to reduce rates back to their break-even level at its earliest opportunity," he said. "Our worst-case scenario would be that the government would start to use EI dollars to shift into general revenue once again. There is a risk of that happening if they don't start to bring down premiums more aggressively in the next year or two."