Head to head: Does the federal government’s 2015-16 budget set Canada on the right fiscal path?

Irene Lanzinger, president of the B.C. Federation of Labour, and Niels Veldhuis, president of the Fraser Institute, go head to head

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Irene Lanzinger | Joe Oliver’s balanced budget strikes the wrong balance for Canadians

The reality, however, is that tax cuts deepen the divide between haves and have-nots in our country while leaving important public services and infrastructure to wither

The 2015-16 federal budget contorts the notion of balance in ways that would make a Cirque du Soleil acrobat cringe. Whether it’s the shaky assumptions underpinning his budget forecast or the dismal and divisive fiscal choices tabled in his document, Finance Minister Joe Oliver’s budget is anything but balanced.

Let’s start with the basics: Oliver’s claim about recording a budget surplus for 2015. That assertion rests largely on some fancy budgetary footwork that starts with the sell-off of public assets – in this case the federal government’s shares in General Motors.

Add to that total transfers from the employment insurance fund, a fund mandated to provide benefits and retraining to Canada’s unemployed but because of ever-increasing restrictions placed on those benefits, now only 37% of the unemployed receive those benefits.

Then top it off with a large slice from the contingency fund. Combine just those three items and Oliver was able to plump his revenue figures up by an additional $7 billion, just enough to give him the political room needed to say he had a $1 billion surplus.

But the accounting footwork doesn’t stop there.

The 2015-16 budget makes some doubtful assumptions about how Canada’s economy will perform. Bank of Canada governor Stephen Poloz was unambiguous in his assessment, noting that the current economic statistics were “atrocious.”

Few analysts believe the Canadian economy will perform well this year. Most see GDP struggling to get close to a break-even growth rate of 2%. That dismal outlook can be traced back to the federal government’s overreliance on the energy sector, an economic strategy that has been repeatedly challenged for ignoring the need for greater economic diversification.

While the accounting footwork and shaky economic assumptions raise serious questions about the 2015-16 budget, just as worrisome are the fiscal and spending priorities at its heart.

Oliver is bound by an economic doctrine that just doesn’t add up. It can be described with two words: tax cuts. Those cuts have been a hallmark of the Stephen Harper government and have been justified as a driver of economic growth.

The reality, however, is that tax cuts deepen the divide between haves and have-nots in our country while leaving important public services and infrastructure to wither.

Whether it’s the near doubling of eligible contributions to tax-free savings accounts (TFSA) or the proposed income splitting measures, the 2015-16 budget will not only establish new priorities that will deplete the federal treasury of close to $15 billion, but also establish tax measures that tilt benefits heavily toward higher-income households, a move that will add to rising inequality in Canada.

Sensible alternatives to these skewed fiscal priorities are easy to identify and would position Canada to grow in ways that create real prosperity. For example, Canadian families would benefit enormously from a national child-care program, a program that could be easily financed with half the amount that the Conservatives have targeted for TFSA and income-splitting measures.

Canada’s cities need a new deal to help upgrade failing infrastructure and long-overdue transit improvements. That, too, could be financed with smarter spending choices than what Oliver has offered. Canada needs a national pharmacare program, and current research shows such a program would save money if the federal government were prepared to show leadership on this issue.

And as if to further undermine the choices that Canadians look to government to make, Oliver is also proposing balanced-budget legislation, a move that would handcuff future governments to a very narrow band of public spending. It’s a prescription for austerity that will threaten current programs and become the justification for continued erosion of everything from health care and provincial transfers to pensions and national infrastructure.

Balance will likely be the new buzzword in Ottawa between now and federal election day. This budget has made that a virtual certainty.

What’s missing, of course, is the real question in this budget: balance for whom?

Based on what the minister tabled, the answer is: most of us will get a lot less so that a select few can get a lot more. 

Irene Lanzinger (exec@bcfed.com) is president of the BC Federation of Labour. Head to Head runs monthly.

Niels Veldhuis | A federal budget that is equal parts unsurprising and uninspiring

Research has shown that differential tax rates based on company size create a disincentive or barrier for small firms to grow into large ones

This year's federal budget wasn’t all that surprising. Many of the government’s big initiatives were already announced or telegraphed in the Conservatives’ 2011 platform. The remainder included a smattering of smaller initiatives to satisfy various interest groups in advance of the federal election.

Where the budget falls short is on offering up big-thinking policy changes that would push Canada’s economy forward – something the country desperately needs in light of depressed oil prices and expectations for weaker economic growth.

An example of uninspiring change is the government’s primary tax policy change: reducing the preferential corporate income tax rate for eligible small Canadian businesses. The rate, currently 11%, will be reduced by 0.5 points each year starting next year to 9% by 2019.

While this might seem positive on first glance, it will create unintended distortions. Once fully implemented, the gap between the rate faced by small and large businesses will grow (the federal rate for large firms is 15%). Previous research has shown that differential tax rates based on company size create a disincentive or barrier for small firms to grow into large ones. The risk is that small companies find ways to stay small to avoid paying the higher rate. This is problematic because large firms tend to invest more, be more productive and pay higher wages.

A better option would have reduced the general corporate rate (15%), bringing it closer to the existing small-business rate (11%).

More generally, Canada (both federally and provincially) has made great progress on making its corporate tax regime more competitive over the years. Where we lag relative to our international counterparts is on personal taxes; our rates tend to be higher and kick in at relatively lower income levels. This is something both Liberal and Conservative governments have identified as a key economic problem.

Reforming the federal personal income tax system would have given Canada the economic shot in the arm it needs.

For instance, the government could have enacted broad-based tax reform in the form of lower personal income tax rates to improve Canada’s competitiveness and strengthen our economy by encouraging productive activity like increased work effort, saving, investment and entrepreneurship. And the fiscal room for such reform could have been achieved by cleaning up the tax code and doing away with several boutique tax credits that increasingly populate our tax system and make it complex.

Alternatively, the Conservatives could have reduced capital gains taxes, which apply to the sale of assets when the selling price exceeds the original purchase price. This may not be the sexiest policy topic heading into an election year, but the reality is that capital gains taxes impose enormous economic costs and bring in relatively little revenue in return (just 1.1% of total federal revenue).

The real drawback with this budget is the lack of strong economic vision for Canada and missed opportunity to truly set the foundation for stronger economic growth and higher living standards for Canadians.

That said, the budget did follow through on an earlier commitment to expand the annual room for tax-free savings account contributions to $10,000 from $5,500. This positive move will increasingly allow Canadians to shelter investment income from taxation.

As for the biggest news item in the budget, the government also followed through on its plan to return to a balanced budget this fiscal year, ending a seven-year period of consecutive deficits totalling nearly $150 billion.

While the Conservatives should be credited for remaining steadfast in their position to return to balance, there are reasons why the fiscal balance is far from certain. In order to achieve the $1.4 billion “surplus” in 2015-16, the government is partly relying on one-time asset sales (including a $2.1 billion net gain from selling General Motors shares).

In addition, the government has lowered the annual cushion in its fiscal plan relative to last year’s budget. The government had previously built in a $3 billion annual cushion to protect against unforeseen risks; the cushion was cut to $1 billion for the next three years.

In light of falling projected economic growth, now is a risky time to reduce the cushion, especially with razor-thin surpluses. Instead of bold, pro-growth ideas, the Conservatives chose a largely status quo and stay-the-course budget. It may not have been surprising, but it certainly wasn’t inspiring. 

Niels Veldhuis (niels.veldhuis@fraserinstitute.org) is president of the Fraser Institute. This commentary was co-written by Charles Lammam, the institute’s director of fiscal studies.