iPolitics e-book: Budget 2012, part 2

March 29, 2012

Canada’s go-to political website

THE CANADIAN PRESS/FRED CHARTRAND

Evening Brief, Budget Day edition G

ood evening … unless you are one of the 19,200 in Ottawa being laid off or eased into retirement.

Nothing distracts journalists like bright shiny things, so the government thought distracting us with its decision to eliminate the penny would keep us from reporting on the steep spending cuts announced today. It worked.

Just watch the news.

After weeks of leaks and rumours, Finance Minister Jim Flaherty announced plans to cut $5.2 billion from program spending. The bulk of these cuts will be felt within a few city blocks in downtown Ottawa. The govern-

ment says it will eliminate 12,200 jobs through workforce adjustment and, over time, another 7,000 through attrition.

Top on the hit list: PCO, Intergovernmental Affairs, CIDA, NDHQ, and Environment Canada.

The CBC got dinged too for about 11 per cent of its budget, but they’ll be happy, as they had feared the cuts would be as much as three times that amount.

Businesses will have to cope with a significant change in how SRED (Scientific Research Experimental Development tax credits are allocated. Flaherty chopped $500 million a year from the

$3.5-billion program and shifted a layer of bureaucracy so that businesses will have to pre-qualify for them as opposed to applying them in their tax calculations.

And, if you were born after 1962, retirement just got a lot farther away.

It wasn’t all bad news. There’s plenty of infrastructure spending, particularly among first nations. The Coast Guard gets a new fleet and shipping gets new ports and navigation charts.

From Scott Clark, former DM of Finance, and Pete DeVries, a former ADM: The document is entitled “Jobs, Growth and Long-term Prosper-

ity,” but there is no discussion as to what the long-term challenges are and the kinds of policy actions required; there was no justification put forward for the proposed changes to OAS and that the initiatives proposed to strengthen innovation are simply a long list of small spending proposals; The proposals to streamline regulatory regimes, cut red tape and change immigration selection process are also vague in nature.

Check back on our site for Scott’s and Pete’s analysis and watch for them in an exclusive iPolitics webcast.

``We are a moderate, pragmatic government that responds to the facts as they are and not as we might wish them to be.’’

— Finance Minister Jim Flaherty at his Thursday news conference ``We are fiscal conservatives, we are a majority now, the economy is growing — albeit modestly. ...

We’re looking to the future.’’

— Flaherty at his news conference ``They’re not good managers. They are not going to go at this with a scalpel, they’ll always go at it with a rusty machete. It’s a clear-cut.’’

— NDP Leader Thomas Mulcair ``I don’t see a message here about jobs and growth.’’

— Interim Liberal Leader Bob Rae ``What the budget is doing is handing off the baton from government to the private sector to carry economic growth.’’

— Craig Alexander, chief economist at TD Bank The Canadian Press

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THE CANADIAN PRESS/FRED CHARTRAND

Austerity budget cuts 19,200 jobs …. and the penny Eric Beauchesne

T

he federal government will wipe out the deficit by middecade as planned by cutting billions a year from program spending across departments and will ensure its finances remain sustainable in the long run by delaying the payment of old age security to low- and mid-income elderly.

“Our government is looking ahead not only over the next few years but also over the next generation,” Finance Minister Jim Flaherty said in tabling his first budget crafted since the Harper government won its majority last spring.

The broad-based austerity budget will cut nearly seven per cent or $5.2 billion from annual ongoing program spending across more than two dozen departments by 2014-15, and reduce federal government employment by nearly 20,000, much of that in the Ottawa area and only about 7,000 through attrition.

Flaherty told a news conference that his Economic Action Plan 2012 budget reflects the government’s “fiscal conservative” views and that it now has a “majority.”

However, he and his budget stressed the job losses, at 4.8 per cent of federal employment, pale in comparison to the 50,000 positions or 14 per cent of the federal workforce eliminated during the Chretien Liberal government’s

attack on the deficit in the mid1990s.

Peter DeVries, a former senior finance department official, questioned whether the government will be able to realize the savings, most of which he noted are dependent on increasing efficiencies in department operations.

“I’d be surprised if all the cuts materialized,” said DeVries, a view echoed by several other former senior department officials.

And departments will be challenged to manage the cuts, said Barb Kieley, an analyst with accounting firm Ernst and Young, noting that many of those who will be leaving will be senior experienced public servants who will be needed the most to manage the changes.

Also, the cuts are to take place over a relatively short period of time and are coming on top of an earlier round of spending reductions, so they will affect the ability of some departments to deliver services, she added.

Douglas Porter, economist at BMO Capital Markets, said the level of restraint should not hurt the economy unduly, noting that federal spending will still rise by about two per cent a year, in line with the anticipated level of inflation.

The only real “surprises” in the budget, Porter added, were the announcements that the penny coin will be eliminated, and that

the amount that cross-border shoppers can bring back dutyfree is being raised to $200 after a 24-hour stay and $800 after a 48-hour stay, a move that is certain to add to the already record flow of cross-border shopping by Canadians.

While the budget claims much of the savings in spending will come from increased efficiencies, it is cutting some programs entirely, including Katimavik, a youth training program launched by the Trudeau Liberal government and that the former Mulroney Conservative government unsuccessfully tried to eliminate two decades ago.

Meanwhile, the budget subtitled — Jobs, Growth and LongTerm Prosperity — shifts federal support for research and development to commercial objectives but will reduce the benefits, especially for larger firms.

It promises to boost the performance of the economy by streamlining reviews of major projects, pursuing new and deeper trade deals, as well as moving ahead with plans for closer integration with the U.S. economy, opening the door to foreign takeovers in the telecommunications sector, and focussing immigration policy on attracting skilled workers.

It projects that the deficit in the 2011-12 fiscal year just ending will be $24.9 billion, more than $6 billion less than projected in the last budget thanks to stron-

ger than expected growth in revenues. It sees the books being balanced by 2015-16 when it projects a small $3.4 billion surplus.

Royal Bank chief economist Craig Wright, said the deficit will likely be eliminated sooner than projected in the budget, noting the faster than expected reduction in the deficit to date.

The budget projects economic growth of 2.1 per cent in 2012 and then 2.4 per cent next year, in line with projections in the budget update last November, but somewhat less than RBC’s projection for 2.6 per cent growth this year and next, Wright also noted.

Flaherty, however, warned that the ongoing recovery in the economy faces risks, especially from the fallout from the European debt crisis.

While the budget promises program spending cuts, it noted that planned increases in payments to other levels of government for health care and social services and to individuals will be maintained.

However, the government will gradually raise the age of eligibility for old age security and the guaranteed income supplement for the elderly poor to 67 from 65 from 2023 to 2029, while also allowing persons to delay payment of their old age security for up to five years in exchange for more generous payments later.

“This gradual approach will enable younger Canadians to plan

The broad-based austerity budget will cut nearly seven per cent or $5.2 billion from annual on- going program spending across more than two dozen depart- ments by 2014-15, and reduce federal government employment by nearly 20,000, much of that in the Ottawa area and only about 7,000 through attrition. ahead with confidence,” Flaherty said in his budget speech.

“Beyond this, we will also ensure that government employee pension plans are sustainable and financially responsible, “ Flaherty said, adding that MPs and Senators will also start having to contribute more towards their pensions.

However, Scott Clark, a former deputy finance minister, said that pushing back the age at which Canadians, especially the elderly poor, can collect old age security will push more of them onto provincial welfare rolls, with little or no real savings for Canada or the economy.

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MATTHEW USHERWOOD/IPOLITICS

Conservatives target 19,200 civil servants for layoffs and attrition Elizabeth Thompson About 19,200 federal government jobs will be slashed during the next three years, Finance Minister Jim Flaherty announced Thursday as he unveiled details of the government’s plan to reduce its spending.

While 7,000 jobs will be reduced through attrition and retirements, another 12,000 employees won’t be so lucky and will face layoff notices.

Overall, Canada’s public service will be cut by 4.8 per cent. The lion’s share of the job cuts will hit the national capital region.

Managerial ranks will not be spared. The government will cut 600 executive positions between now and 2015 or 7.4 per cent of its executive workforce.

Nor are the cuts spread evenly.

For example, while the finance department will cut spending 16.8 per cent, in part through eliminating the penny, the Veterans Affairs department is only being trimmed 1.1 per cent over the next three years.

Thursday’s budget marked the end of a secretive year-long strategic and operating review process that set out to trim government

administration costs between 5 and 10 per cent. In the end, the government will cut 6.9 per cent or $5.2 billion of the $75 billion worth of spending reviewed.

The process was so secretive that in most cases, even top managers only learned Thursday how their departments would be impacted.

While each department proposed cuts to a cabinet subcommittee chaired by Treasury Board President Tony Clement, those proposals were also reviewed by Deloitte and Touche. The subcommittee then reported to finance, which made the final decisions.

However, because the cuts were considered part of the budget process, officials could not even say Thursday whether ministers were aware of the cuts in their own departments before the budget was tabled.

It may be weeks, if not months, before Canadians know the full extent of what is being cut. Officials say notice of job cuts will first be sent to the employees affected and their unions. There were no officials from different departments on hand in Thursday’s lock up to explain the details of the cuts for each department.

The focus throughout is on

reducing “back office” costs, refocusing programs, using new technology to reduce costs and making it easier for Canadians to deal with the government. However, some of the government’s policy analysis capacity will be reduced and some organizations are being scrapped entirely.

Gone are bodies like the youth service program Katimavik, the Advanced Leadership Program at the Canada School of Public Service and the National Round Table on the Environment and the Economy as well as the Public Appointments Commission Secretariat, which Prime Minister Stephen Harper set up but which was never fully operational. Assisted Human Reproduction Canada, whose mission was thrown into question following a December 2010 Supreme Court ruling, will wind down its operations by March 31, 2013.

The CBC, which has come under fire from Conservative MPs, will see its billion dollar budget cut by nearly 11 per cent at the end of three years.

The department of foreign affairs will generate $80 million in savings by selling off some of its official residences abroad. Diplo-

Wake up to the Morning Brief

mats will be posted overseas longer and there will be changes in their job conditions.

Public service pension plans, which currently get 64 per cent of their money from the employer, will move to a 50/50 formula.

The attractive MPs pension plan won’t be touched for current MPs but changes will kick in for members of the next Parliament.

Regulations concerning food packaging will be eased, allowing the importation of new products from international markets.

The government is also changing how the Canadian Food Inspection Agency monitors non-health and non-safety food labeling and is introducing a web-based verification tool to allow consumers to bring concerns to companies and associations.

Drug regulations will be eased to give doctors and patients quicker access to drugs that have already passed a safety review.

However, the budget does not spell out whether that review will have to be a Canadian one.

The 96,000 beneficiaries of the Veterans Independence Program, which provides housekeeping and grounds maintenance services, will no longer have to track

Thursday’s budget marked the end of a secretive year-long strategic and operating review process that set out to trim government administration costs between 5 and 10 per cent. their receipts. Instead, they will get an annual grant. The government estimates that move alone will eliminate 2.5 million transactions a year.

Public Works and Government Services will introduce new office space standards in Crown owned and federal government occupied buildings, consistent with industry practices. However, there were no officials on hand to explain what that means. elizabeththompson@ipolitics.ca

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Canada to invest $5.2B in Coast Guard fleet Colin Horgan If you’re looking for the next major maritime procurement coming in Canada, look to the coast guard.

During the next 11 years, Canada will invest $5.2 billion to renew the Canadian Coast Guard Fleet. The project is in addition to contracts already handed out in Canada’s recent national shipbuilding strategy procurement process.

In his budget speech, Finance Minister Jim Flaherty made passing reference to the plan noting that the government will renew the fleet and mark the

Coast Guard’s 50th anniversary.

The budget itself gives a few more details as to how the $5.2 billion will be spent.

“The procurement of new vessels and helicopters for the Canadian Coast Guard, as well as work related to repairing and refitting existing vessels, will support jobs and generate significant economic benefits,” the budget states.

However, it does not specify when the procurement will begin, where the contracts for the new vessels and helicopters will go, or what kind of ships the government plans to buy.

The budget also notes a further

$9 million investment in “training, infrastructure and opportunity” for the Coast Guard in the 2012-13 fiscal year and a further $29 million in 2013-14.

The government also plans to invest $27.3 million over two years “to support the divestiture of regional port facilities and the continued operation and maintenance” of Canada’s ports.

“Port divesture improves the efficiency of Canadian marine transportation by rationalizing the port system and placing decision making and operations in the hands of users and local interests,” the budget states. “This will allow communities to own

and control the use to their facilities and determine service and maintenance levels appropriate to their circumstances.”

Meanwhile, the government plans to “streamline internal services and low-performing processes” at Canada Border Services Agency. It plans to save $31.3 million in the 2012-13 fiscal year and for ongoing savings past 2014-15 to total $143.4 million.

In late 2011, Canada signed a perimeter security deal with the United States that plans to aid cross-border trade and allowing for more and quicker trade between the two countries.

Walter Natynczky has said that at the same time Canada ensures it has a “combat capable force,” it must “spread the message with regard to mental health.”

DND cuts account for one fifth of federal budget cuts over next three years Murray Brewster/ THE CANADIAN PRESS OTTAWA _ Roughly one-fifth of all federal spending cuts over the next three years will come at the expense of the Defence Department, the budget tabled Thursday

by Finance Minister Jim Flaherty indicates.

The hit will be a substantial one for a department that for many years saw generous increases under the Harper government and whose budget approached $21.2 billion last year.

Under the plan tabled by Flaherty, a defence analyst estimates the overall defence budget will fall to ``roughly $19 billion and change’’ by 2014-15.

Brian MacDonald, of the Conference of Defence Associations, said it’s hard to peg an exact figure because the government has only released initial figures, and more information is yet to come. ``Yes, there was a large budget reduction, (but) I think the (Canadian Forces) got off a lot lighter than people were expecting,’’ MacDonald said.

Part of the budget hit can be attributed to the decision to move the ultra-secret Communication Security Establishment out of the budget of National Defence and into a stand-alone agency.

The budget did not make clear precisely how the cuts will be made, other than vague references to the department’s plan to ``streamline contracting procedures, and centralize property and human resources management.’’

Flaherty’s plan cuts operational spending by $327 million at National Defence this year, a figure that ramps up to a total of $1.1 billion by 2014-15 _ numbers that translate into an overall 7.4 per cent reduction.

It is unclear from the budget documents how much of a hit the department’s $4.1-billion capital budget will take. But Flaherty did make clear that $3.54 billion in equipment spending, which was sprinkled over several years, is being pushed off into the future.

There is no indication which projects are be re-profiled, although a number of programs _

including new fixed-wing search planes, maritime helicopters and new supply ships for the navy _ are already facing substantial delays.

The spending plan makes a point of saying that the government is committed to retiring the air force’s aging CF-18 by ``acquiring an affordable replacement,’’ but makes no mention of the controversial and long-delayed F-35 stealth fighter.

That reference grabbed MacDonald’s attention. ``The word ‘affordable’ is not one we’ve heard before,’’ he said. ``That is something I am looking at with great interest.’’

Associate Defence Minister Julian Fantino took a step back from the program earlier this month by saying the government is still weighing its options about whether to buy the F-35, a plan which at $9 billion for 65 jets is considered the most expensive defence procurement in history.

The slashing of the National Defence operating budget is also forcing the government to backtrack on a commitment to in-

crease the size of the military to 70,000 full-time and 30,000 reserve soldiers.

The budget says the size of the Forces will hold steady at 68,000 regular members and 27,000 part-timers.

The fiscal plan does make a concession to small businesses who employ reservists by compensating them for hiring and training replacements while the employee is deployed overseas.

The measure was something the business community wanted to see during the war in Afghanistan, but with the country’s withdrawal from combat last year, the impact is expected to be minimal.

At the same time, Veteran Affairs Canada will face a modest 1.1 per cent budget cut despite the pressure brought to bear on the Conservatives to entirely exempt the department from any and all reductions.

Canadian veterans have been campaigning for the department to be left untouched, following the example of the U.S. and Britain.

The Royal Canadian Legion

was blistering in its criticism, saying the reductions will affect veterans and their families, regardless of government assurances to the contrary.

Pat Varga, the Dominion president, described it as unacceptable. ``This is a step in the wrong direction,’’ Varga said. ``The federal government is obliged to support our veterans and their families for their commitment and sacrifice to Canada.

This is not the way to treat those that have voluntarily served Canada. It shows no compassion, no heart and no conscience on behalf of the federal government.’’

One change announced Thursday involves the Veterans Independence Program, which provides housekeeping and other light household services to elderly and disabled veterans.

Instead of having to submit individual receipts and burn up bureaucratic processing time, veterans will now get an annual grant to cover the cost.

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``We’ve been led to believe that this government is capable of providing leadership and making tough decisions but, if it is, there’s no proof of that in this budget at all.’’

— Gregory Thomas, federal director of the Canadian Taxpayers’ Federation, complaining that the gold-plated pension plan for MPs was untouched in the budget ``We were disappointed in the baby steps taken by the federal government to restrain its spending. While there has been a lot of talk about the amount of spending reductions in this budget, overall program spending continues to rise.’’

Penny pinching Conservative budget sets Canada on pro business track Bruce Cheadle/The Canadian Press A penny-pinching Conservative government is loosening the reins on Canada’s business community in a budget it says will position the country for unbridled commercial opportunity.

With an eye to the long game after years of politically attractive, minority budgets, Finance Minister Jim Flaherty is trimming $5.2 billion in annual federal spending — scrapping the money-losing penny in the process — while raising the age of eligibility for old age security to 67 from 65, starting a decade from now.

Thursday’s federal budget, the seventh since Stephen Harper took office, is the first with an overtly pro-trade and resource development bent and a dearth of voter-friendly goodies. A majority mandate with three full years before the next election will do that for a conservative-minded prime minister. ``We are a moderate, pragmatic government that responds to the facts as they are, and not as we might wish them to be,’’ Flaherty said in the budget lockup Thursday. ``We are fiscal conservatives, we are a majority now, the economy is growing _ albeit modestly....

We’re looking to the future.’’

Flaherty said Canada ``wants to be in the next league. We want to be with the emerging economies.

We want to be with the economies of Asia and South America that are growing, and we’re in a position in this country to get there.’’

The blowback was immediate: a noisy group of protesters perched in the House of Commons public gallery began to chant slogans as Flaherty delivered his speech. ``Where are we in your budget? This is not our budget!’’ they shouted before being led out by security guards.

The budget’s business-friendly measures include streamlining environmental assessments to speed major resource projects _

think pipelines _ into existence; recasting research and development funds; tailoring the labour market, including immigration, to specific job shortages; and a focus on new free-trade deals.

There’s $500 million in government largesse for venture capital, $1.1 billion in directed research and development funding, and $205 million for a one-year extension of a temporary hiring credit for small businesses. ``What the budget is doing is handing off the baton from government to the private sector to carry economic growth,’’ said Craig Alexander, chief economist at TD Bank.

The transformation will come from a shuffling of priorities, not big new spending programs.

Research funding, for instance, will be shifted dramatically away from pure science to more commercial applications. ``It’s a whole bunch of little things around the edges,’’ said Alexander.

Not so, said Greenpeace Canada, which issued a release claiming ``big oil is the big winner in today’s budget.’’

It’s also an austerity budget, whatever the government claims.

Total spending, including debt servicing charges, will rise to $276.1 billion in 2012-13, a marginal increase of 0.11 per cent on the current $272.9 billion envelope. Program spending is projected to rise just 2.1 per cent annually for years, effectively flatlining in real terms after inflation and population growth. ``It’s going to take an awful lot of tough decisions to restrain to that degree on such a long period of time,’’ said Alexander. ``In actual fact, it’s more fiscal restraint than we had in the ‘90s (under the former Liberal government) because in that period we had very sharp cuts followed by a rebound in spending. This time it’s going to be slow spending for many years. ``It’s easy to say, extraordinarily

difficult to do.’’

The Conservatives had been signalling even deeper cuts, but Flaherty rejected recommendations from cabinet’s strategic operating review committee for cuts totalling $7.5 billion. An improving economy that lowered deficit projections convinced Flaherty and Harper more draconian cuts weren’t needed.

Thomas Mulcair, the newly installed NDP leader, nonetheless likened the budget to a ``clear cut.’’

Conservatives, said Mulcair, ``like being in power, but they’re not very good ... managers, so they’re not going to go at this with a scalpel. They’ll always go at it with a rusty machete.’’

Liberals said the spending blueprint sets the country on a collision course. ``This is a budget of division that not only pits one generation against another, but also prosperous regions against regions that are suffering,’’ said Liberal finance critic Scott Brison.

But others were equally adamant the government didn’t go far enough. ``Spending cuts announced today are a drop in the bucket,’’ sniffed Gregory Thomas of the Canadian Taxpayers Federation.

Catherine Swift, head of the Canadian Federation of Independent Business, lauded the government for enacting at least parts of eight of her group’s 12 recommendations, but added the budget ``was too tame in terms of its actual cuts.’’

The federal deficit, which Flaherty projected just five months ago would come in at $31 billion this year, will actually be $24.9 billion, falling to $21.1 billion in 201213 and $10.2 billion the year after.

The government continues to maintain the books will be balanced in 2015, although the spending and revenue track suggests it could come in a year ahead of schedule.

Indeed, the budget lays out a

course that will put the federal books back where they were before the deep global recession of 2008 knocked governments askew from Ottawa to Canberra.

The budget document, for the most part, is careful to obscure exactly where the greatest pain will come from spending cuts, while broadly outlining that 19,200 federal jobs are to be cut — some 4.8 per cent of the federal workforce.

The National Round Table on the Environment and the Economy is being eliminated, as is the youth program Katimavik, along with a travelling leadership program for civil servants and Harper’s own, stillborn public appointments commission from his 2006 campaign platform. The CBC faces a 10 per cent budget cut.

Other significant cuts will only be felt as individual departments wield the knife internally.

National Defence will see its budget fall by more than $1.1 billion by 2014-15, Public Safety will take a $688-million haircut and international assistance falls $377 million annually within three years. Both the health portfolio — including Health Canada, the Canadian Institutes of Health Research, and Assisted Human Reproduction Canada — and Agriculture and Agri-Food Canada will lose $310 million by 2014-15.

There are some budget winners.

While the overall budget of Aboriginal Affairs is to be cut $165 million by 2015, there’s $275 million in new money over three years for native schools and education, and almost $331 million over two years to improve water systems on reserves.

The Canadian Coast Guard gets $5.2 billion over the next decade to renew boats and helicopters.

There’s also an injection of $482 million over two years for the unemployment insurance system, including incentives for accepting work and ensuring benefit levels align with local labour market conditions.

— Catherine Swift of the Canadian Federation of Independent Business. ``Given its declining purchasing value, some Canadians consider the penny more of a nuisance than a useful coin.’’

— Budget document explains the demise of the one-cent coin. ``Of the 30 billion pennies, I think half of them are under my bed in a big jar.’’

—New Democrat MP Pat Martin, who has tried to kill the penny with private member’s bills. ``Canada faces a fast-changing global environment, with increasing competition from emerging market countries and a global economy that remains fragile and uncertain.’’

— Budget in brief ``We won’t have these, well, quite frankly ridiculous, situations where we have assessments going on for years over projects, that are sometimes abandoned because the process itself takes so long and at such great expense.’’

— Flaherty, explaining why he wants to streamline the environmental assessment process ``The question is the integrity of the process. What’s happened to this government is they’ve attacked the integrity of the process, they are attacking the integrity of the people who are opposing projects, they’re attacking the integrity of people who are appearing.’’

— Rae on the changes to environmental reviews The Canadian Press

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Sights from the media lock up Matthew Usherwood

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8 iPOLITICS BUDGET BRIEF

THE CANADIAN PRESS

Ho Hum Keith Beardsley Well the budget has landed with a soft bounce instead of a hard thud. For weeks the experts were predicting all sorts of draconian cuts, including up to 60,000 public servants. Instead it is fairly moderate.

Wisely the Conservatives did not go for across the board cuts, but different departments will lose various amounts. Questions still remain though about who (probably the provinces) will pay for the costs of implement-

ing the new crime legislation.

The CBC — a long-time Conservative target — was cut $115 million, but even that amount can be adjusted too.

The OAS issue is a bit more complicated. If you are over age 54 you are probably smiling but between 50 and 54 not so much.

Most folks expected that the Conservatives would amend OAS so that you would have to work until age 67. What wasn’t known was the exact cut off point. Now we know it, but again this wasn’t unexpected; the Conservatives

had been signaling the changes for quite some time. For many of us already over age 60, whether there was a change to the OAS or not, we had already decided that we needed to work longer as it had become an economic necessity long before this budget came in.

The budget will not be without controversy. Cuts to the civil service will be vigorously opposed and already union leaders are talking about taking the fight into every constituency in the country. But realistically, if the

vast majority of the cuts will be to workers in the Ottawa region, how much sympathy will they get the further you get out of the capital region?

In their desire to stimulate resource development the government will be making changes to the environmental assessment process. Essentially streamlining it and setting the length at 24 months. This will speed up the approval process for large projects, but it will most likely be met with vigorous resistance. It remains to be seen which way the

general public will go… it will be jobs today versus protecting the environment for future generations.

Right now we only have the broad strokes of what the government will do, over the next weeks and months more details, including legislation will emerge and we will have a much clearer vision of exactly what the government’s plans are, but for today this budget wasn’t the draconian one many predicted… unless you love the penny… it is to be eliminated!

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View on the Hill

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iPolitics Special Report

The podcasts [click a photo to play]

March 12: How can we judge the credibility of Jim Flaherty’s budget?

March 13: Exactly who will decide if Flaherty’s fiscal policy is credible?

March 14: Question marks, best guesses and the reality of the 2012 budget

Scott Clark and Pete DeVries outside budget lock up, March 29, 2012

ABOUT THIS SERIES Jim Flaherty is due to deliver

the 2012 budget on March 29. While many in Ottawa are braced for austerity measures, the finance minister has been downplaying expectations while insisting his will be a jobs and growth budget.

So how will we assess this budget? Will it reflect a transparent and accountable approach to budget planning? In what ways can we judge its credibility?

ABOUT OUR EXPERTS Scott Clark and Pete DeVries require no introduction in finance and policy circles.

Clark has held a long list of senior positions in the Canadian government. He served in a number deputy minister positions in the department of finance, was a senior adviser to the Prime Minister Jean Chrétien and was Canada’s executive director to the IMF in the early 90s.

DeVries also played many senior roles in the department of finance. He was director of the fiscal policy division, which made him responsible for the overall preparation of the federal budget.

“Our passion is just good public policy,” Clark explains. “We’ve been involved in it for decades.

I worked with both Liberal and Conservative governments.

MATT USHERWOOD/IPOLITICS

March 16: Why Flaherty gets an ‘F’ for transparency In both cases, the ministers of finance and the prime minister sought the advice of the public service. Our job was to provide the best analysis we could.”

These days, he says, he has the sense that the advice of the public service is not being sought.

“There’s a gulf between the public service and what’s actually being decided and how it’s being made public in terms of transparency.

“I think that going forward that to address the major economic and public policy challenges, there needs to be a bringing together of the public service and cabinet and the prime minister. They have to get involved more. If the public service doesn’t play a more important role, then success will be difficult to achieve.”

March 19: ‘He can’t just be tinkering …’

What the 2012 budget has to do

March 20: What comes next?

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Budgets 2003–2012 Includes both the March 2011 and post-election, June 2011 budget speeches.

RALPH GOODALE Finance Minister 2003–2006 [3 speeches]

Total/speech Words spoken 13 314 Tax 63 Jobs 14 372 Canada/ians

Average/speech 6 657 21 4.6 124

Total/speech Words spoken 26 292 Tax 282 Jobs 95 709 Canada/ians

Average/speech 3 756 40.2 13.5 101.2

JIM FLAHERTY Finance Minister 2006–present [8 speeches]

Finances

Includes: tax/es, tax credit, tax cut, debt, deficit, fiscal, economic

2003: 52

2004: 46

2005: 65

2006: 91

2007: 69

2008: 83

2009: 108

2010: 50

March 2011: 38 March June 2011: 2011:6838 March June 2011: 2012:6841

Development

Governance

Education

Includes: future, opportunity, development, innovation, challenge Jobs

Includes: transparency, accountability, plan

Includes: education, post-secondary, learning, school

Includes: health, health care

Includes: environment, environmental, sustainable

2003: 28

2003: 8

2003: 29

2003: 14

2003: 57

Health

2004: 38 2004: 7 2004: 42

2004: 24

2005: 12 2005: 11 2006: 22 2006: 14

2005: 40

2006: 21

2007: 21

2008: 16 2009: 47

2005: 19 2006: 8

2009: 50

2010: 16 March 2011: 15 June 2011: 28

2010: 46 March 2012: 19

March 2011: 6 June 2011: 39

March 2012: 62

2007: 21

2006: 4 2007: 8 2008: 8

2008: 4 2009: 3 2010: 4

2008: 30

2004: 11 2005: 33

2007: 22 2007: 18

Environment

March 2011: 1 June 2011: 10 March 2012: 3

2008: 7

2009: 3

2009: 2

2010: 4

2010: 2

March 2011: 3

March 2011: 0

June 2011: 0

June 2011: 3

March 2012: 9

March 2012: 3

12 iPOLITICS BUDGET BRIEF

T

Text of Finance Minister Jim Flaherty’s budget speech, delivered Thursday in the House of Commons:

oday we present Economic Action Plan 2012. It is Canada’s plan for jobs, growth and long-term prosperity.

Looking ahead, Canadians have every reason to be confident.

Other Western countries face the risk of long-term economic decline. We have a rare opportunity to position our country for sustainable, long-term growth.

Others now have little room to manoeuvre. We are free to choose our future. We have made our choice. Our government chooses prosperity, for all Canadians. We will take decisive action to ensure our economy will create good jobs and sustain a higher quality of life for our children and grandchildren.

In this budget our government is looking ahead not only over the next few years but also over the next generation. We are taking major steps forward to build on the strong foundation we have laid since 2006.

We are avoiding foreseeable problems while seizing new opportunities in the global economy. The reforms we present today are substantial, responsible, and necessary. They will ensure we are focused on enabling and sustaining Canada’s long-term economic growth.

Our goal is to strengthen the financial security of Canadian workers and families, to help create good jobs and long-term prosperity in every region of the country. Still, it is not enough simply to maintain Canada’s advantage among the major advanced economies. We must also position Canada to compete successfully with the world’s large and dynamic emerging economies. In a changing global economy we must aim higher.

We must avoid falling behind.

We must realize the enormous potential of our great country.

Sir George Foster wrote of that potential, a century ago. He helped to shape it over crucial generations-from serving as Minister of Finance under Sir John A. Macdonald to attending the Paris Peace Conference with Sir Robert Borden. His words are more compelling now than he could have imagined.

“There is especial need just now for long vision and the fine courage of statesmanship, and the warm fires of national imagination. Let us summon them all to our aid. We should not be thinking overmuch of what we are now, but more of what we may be fifty or a hundred years hence.

Let us climb the heights and take the long forward look.”

Since 2006 our government has taken that long forward look. We have acted consistently to help create jobs and economic growth.

Our plan is founded on the understanding that keeping taxes low helps hard-working families and supports the businesses that create jobs for Canadians. In the past few years of global economic recession and instability, we have seen the wisdom of that plan. It has enabled us to meet an historic challenge. It has positioned us to seize an historic opportunity. It has protected and strengthened our country.

Protecting and strengthening our country Let us review the record. Our government reduced personal income taxes and cut the GST. We allowed seniors to split their pension. We established the Working Income Tax Benefit for low-income working people. We removed more than a million low-income Canadians from the federal income tax rolls altogether. We established the Registered Disability Savings Plan and the Tax-Free Savings Account – the most important personal savings vehicle since the RRSP. Altogether, we have saved the average family of four more than $3,100 per year in lower taxes.

At the same time, we reduced taxes on the businesses that create jobs for Canadians. Canada now has the lowest overall tax rate on new business investment among major advanced economies. This is a significant advantage for Canada in the global economy. It is helping to create and preserve jobs in communities across the country, now and for the long term.

Because we made responsible choices, when the global economic recession hit we were able to respond decisively. We implemented one of the largest and most effective economic stimulus plans among the nations of the G-0. We made historic investments in infrastructure. We encouraged businesses to invest and helped them to avoid layoffs.

We made substantial new investments in skills training, and we extended support for workers who lost their jobs. We did all of this without creating permanent new bureaucracies.

We did it without taking on the massive debts and long-term deficits now faced by many other countries.

We did it without raising taxes.

As a result, in these difficult years Canada has outperformed most other industrialized countries.

But still, we remain concerned about the number of Canadians out of work. In response, this budget contains measures to create new, high-quality jobs. Still, it is important to remember that Canada is one of only two G-7 countries to have recouped all the jobs lost during the global recession. In fact, since July 2009 our economy has created more than 610,000 net new jobs. The World Economic Forum says our banks are the soundest in the world.

Forbes magazine ranks Canada as the best place in the world for businesses to grow and create jobs. Our net debt-to-GDP ratio remains the lowest in the G-7, by far. The OECD and the IMF predict our economy will be among the leaders of the industrialized world over the next two years.

TAKING THE NEXT STEPS Canadians appreciate the fact that our country is outperforming our peers. They also understand that the global economy remains fragile. They know that our traditional trading partners face serious long-term economic challenges. In addition, Canadians are aware that our country faces challenges of its own. We need to promote innovation more effectively, to keep creating goodquality jobs. We need to plan for the rapid aging of our population, to secure our long-term prosperity.

Many Canadians are concerned about whether they will have enough money for their retirement. They wonder whether our social programs will be there when they need them. They ask whether there will be good jobs and a higher quality of life for themselves and for their children.

In response to these concerns, there are some who would raise taxes, increase government spending, and shun new trading opportunities. These short-sighted, irresponsible, and dangerous policies would kill jobs, impose crushing deficits, and cripple our economy. They would squander Canada’s advantage. Eventually they would make our social programs unsustainable. We see it in the very difficult circumstances in which Greece and some other European countries now find themselves. These policies would turn us away from long-term prosperity, down a path of long-

term decline.

Our government will not allow that to happen. We will stay on course, to keep creating highquality jobs and long-term economic growth for Canadians.

We will not raise taxes. We will maintain our consistent, pragmatic, and responsible approach to the economy. We will take the necessary next steps to build confidence in our future.

Maintaining and strengthening Canada’s sound fiscal position Canadians need to be confident in our prospects for economic growth. This is the key not only to creating good jobs but also to sustaining our social programs and improving our quality of life. Canadians also need to know that their government will be able to respond boldly to any future economic crises originating outside our borders. To provide this confidence, we must ensure that Canada’s finances are sustainable over the long term. To that end, we will fulfil the commitment we made in the Economic Action Plan budget of 2009, to return to balanced budgets in the medium term.

We are on track. In less than two years, we have already cut the deficit in half. We did it by ending our targeted and temporary stimulus measures, and by controlling the growth of new spending. Now, in this budget we will take the next steps. We will implement moderate restraint in government spending. The vast majority of the savings will come from eliminating waste in the internal operations of government, making it leaner and more efficient.

For example, our government will do what everyone agrees should have been done long ago.

We will eliminate the penny. Pennies take up too much space on our dressers at home. They take up far too much time for small businesses trying to grow and create jobs. It costs taxpayers a penny-and-a-half every time we make one. We will, therefore, stop making them.

Canadians might wonder why this was not done earlier. Canadians might also wonder why public servants are sometimes asked to travel, when a videoconference would be easier for them and cheaper for taxpayers.

Canadians might be surprised to learn that some of the most massive documents the government produces are still printed on paper, when everyone now uses these documents online. If so,

Canadians will be glad to learn that we are putting a stop to these and other wasteful practices in every corner of government.

Because of our government’s responsible choices, we can eliminate the deficit through common-sense, moderate restraint.

We have no need to resort to the drastic cuts being forced upon some other developed countries today. We have no need to undertake the radical austerity measures imposed by the federal government in the 1990s. In fact, our government will return to balanced budgets, while continuing sustainable increases in transfers for social programs. The savings we have identified are moderate.

They will amount to less than two per cent of federal program spending overall.

Ensuring the sustainability of Canada’s social programs Our government has always acted responsibly to ensure the social programs Canadians count on will be there when they need them. As mentioned, we are increasing support for health care, education, and pensions at a sustainable level. Today we are also taking action to ensure the sustainability of Canada’s retirement income system.

Changes were made years ago to the Canada Pension Plan to ensure it would be sustainable.

As a result it is sound and fully funded. Today it is clear we must take action to ensure the sustainability of the Old Age Security program, which is the largest spending program of the federal government.

The Old Age Security program was designed for a much different demographic future than Canada faces today. In the 1970s there were seven workers for every one person over the age of 65. In 20 years there will be only two. In 1970 life expectancy was age 69 for men and 76 for women.

Today it is 79 for men and 83 for women. At the same time, Canada’s birth rate is falling.

The result is that Canadians are living longer and healthier. There are fewer workers to take their place when they retire. Canada has changed. Old Age Security must change with it, to serve the purpose it was intended to serve.

We will make gradual adjustments to the Old Age Security program, to ensure the next generation can count on it. These adjustments will not affect current recipients or those close to retirement. Starting in 2023 and ending in 2029, we will gradually in-

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crease the age of eligibility, from 65 to 67. This gradual approach will enable younger Canadians to plan ahead with confidence. We will also make the program more flexible for those approaching retirement. As of July 1, 2013, Canadians who prefer to keep working will be given the option to defer the start of benefits. This voluntary option will enable them to receive higher benefits as a result.

Beyond this, we will also ensure that government employee pension plans are sustainable and financially responsible. We will adjust these pension plans to be more in line with those available to Canadians working in the private sector. We will also increase the cost-share ratio for the pension plan for Members of Parliament and Senators, effective January 1, 2013.

Our government has already announced increases in transfers to the provinces, to put health care funding on a stable, sustainable path for the long term. Together with our adjustments to Old Age Security, we are ensuring that these crucial programs and services will be there for Canadians over the next generation.

Creating jobs now, while investing in skills training and filling gaps in Canada’s labour force Our focus in this budget is the long-term prosperity of our country. Still, as always, we are also responding to the immediate needs of our fellow Canadians. To create jobs now, we will extend by one year the Hiring Credit for Small Business – a practical, proven measure which encourages businesses to hire more workers.

We will provide new funding to improve border infrastructure.

We will make new investments in local infrastructure, through Canada’s regional development agencies. We will also renew the fleet of the Canadian Coast Guard, now celebrating its 50th anniversary.

While creating jobs now, our government will provide new opportunities for Canadians to gain access to the labour market. We will keep helping older workers in transition to find good, new jobs. We will increase funding for skills training and career experiences, for young Canadians and for Canadians with disabilities.

Canada’s reservists make extraordinary sacrifices to keep our country safe. But potential long absences and added costs mean some employers will not hire them. These brave Canadians should not be disadvantaged.

Our government, working with

Canada Company, will help remove barriers to hiring reservists.

We will also take action to modernize Canada’s Employment Insurance program. We will make it much easier for Canadians who are out of work to identify new opportunities, and for employers to find the workers they need. For EI recipients in areas of sporadic employment, we will initiate modest changes to the program to better focus our support for Canadians who are eager to work. We will also provide new incentives and opportunities for members of First Nations living on reserve, to participate fully in our economy and to gain greater self-sufficiency.

Our government will also take action to build a new legislated framework, in response to the National Panel on First Nation education. As initial steps, we will make new investments to build and renovate schools on reserves. We will increase support for early literacy programming.

We will work with First Nations to build partnerships with provinces and other stakeholders to unlock the potential of Canada’s First Nations children. We will also invest in a long-term strategy to improve water quality in First Nations communities.

In addition, our government will reform Canada’s immigration system, to make it faster and more efficient.

We will ensure it is designed above all to strengthen Canada’s economy. As a result we will be better able to fill gaps in our labour force. We will attract more of the entrepreneurs we need, to create good jobs and long-term economic growth.

Making effective investments to support world-leading research, innovation, and entrepreneurship As part of our plan for jobs and growth, our government has made very substantial investments in science and technology.

Such investments are necessary to help sustain a modern, competitive economy. They encourage innovation – new ideas, which lead to new products and services, and ultimately to new, highly skilled, well-paying jobs.

The key is to leverage private sector investment in research and development. In spite of our efforts so far, Canada is not keeping up with other advanced economies on this crucial front.

In response to the Jenkins Report on innovation, we will provide substantial new funding to

make it easier for entrepreneurs to access venture capital. We will extend our efforts to promote small business innovation, through government procurement contracts. We will provide new investments to support innovation and market development in the forestry sector.

We will double our investments through the Industrial Research Assistance Program.

We will provide new support for partnerships between businesses and universities. We will make new investments in advanced research infrastructure on our college and university campuses. We will streamline and improve the tax incentive program for business innovation, and reinvest the savings in direct support.

We will also review the government’s science and technology organizations, to make them more effective in translating ideas from the lab to the marketplace.

The result will be to position Canada to succeed in the knowledge economy of the 21st century.

We will be able to build more globally competitive companies.

Those companies will create more well-paying jobs and a greater quality of life for all Canadians.

Streamlining the review process for major economic projects As the 21st century unfolds, it is increasingly clear that Canada’s energy and natural resources are massive assets to our country in the global economy. The oil and gas, mining, and forestry sectors directly employ more than three-quarters of a million Canadians. They are driving economic growth across the country.

They are creating good jobs not only directly but also indirectly, in manufacturing, clerical work, skilled trades, and financial services.

Canada’s resource industries offer huge potential to create even more jobs and growth, now and over the next generation. This potential exists in every region of the country-natural gas in British Columbia, oil and minerals on the Prairies, the Ring of Fire in Ontario, Plan Nord in Quebec, hydro power in Atlantic Canada, and mining in Canada’s North.

Recently it has become clear that we must develop new export markets for Canada’s energy and natural resources, to reduce our dependence on markets in the United States. The booming economies of the Asia-Pacific region are a huge and increasing source of demand, but Canada is not the only country to which they can turn. If we fail to act now, this his-

toric window of opportunity will close.

We will implement responsible resource development and smart regulation for major economic projects, respecting provincial jurisdiction and maintaining the highest standards of environmental protection. We will streamline the review process for such projects, according to the following principle: one project, one review, completed in a clearly defined time period. We will ensure that Canada has the infrastructure we need to move our exports to new markets.

Beyond this, we will build on our very effective partnership with the Canadian Federation of Independent Business, to continue reducing red tape across government. Our goal is to allow businesses to focus on what they do best-creating jobs and opportunity, from coast to coast to coast.

Supporting the most ambitious trade expansion plan in Canadian history Finally, as a key part of our plan for long-term prosperity, our government is undertaking the most ambitious trade expansion plan in Canadian history. Experience has shown that opening new export markets provides an enormous long-term benefit to Canada. It creates new opportunities for Canadian businesses and good new jobs for Canadian workers. On a level playing field, Canadians have shown we can compete successfully with the best in the world.

For this reason our government has worked hard to open new markets for Canadian exports.

Before 2006, Canada signed only three new trade agreements in 13 years. Since then our government has signed new trade agreements with nine countries, and we are in negotiations with many more.

Just yesterday the Prime Minister returned from another trip to Asia, launching negotiations on new trade agreements with Thailand and Japan.

The United States will remain our largest and most important trading partner. Still, recent events and long-term trends indicate clearly that we need to diversify Canada’s export markets. We need to open new export markets in the world’s emerging major economies, while strengthening and expanding our existing trade relationships.

We will continue working with the United States to implement our joint Beyond the Border plan, to strengthen and deepen the economic and security links be-

tween our two countries. At the same time, we will harmonize our duty and tax exemptions for 24- and 48-hour trips to match levels for U.S. citizens.

This measure will ease congestion at our borders.

We will conclude negotiations on new trade agreements with the European Union and with India.

We will also begin entry talks with the Trans-Pacific Partnership, and continue building our growing trade relationship with China. By gaining greater access to these vast and growing markets, we will strengthen the financial security of all Canadians. We will create good jobs and long-term growth in every region of the country.

LOOKING A LITTLE AHEAD Since we were first elected in 2006, our government has been focused on creating jobs and economic growth. Ultimately our goal is to ensure long-term prosperity for all Canadians. We are “looking a little ahead,” as Sir John A. Macdonald advised. We can see in the distance every reason to hope.

We see young Canadians, confident in their future; retired Canadians, secure in their senior years; Aboriginal Canadians, realizing their vast potential; new Canadians, strengthening our country as they have done in every generation. We see every region of the country, more prosperous than ever in our history. We see Canadian businesses and universities coming up with things no one has thought of before, leading to new opportunities and a better life for Canadians and for people around the world.

We see Canada, going from strength to strength in the 21st century. We see Canada, at the centre of the world-with a great and friendly market to the south; a continent of opportunity across the Atlantic; and a world of growth across the Pacific. We see Canada, whose wealth, while immense, will be measured ultimately in the greater happiness and security of its people.

We see Canada for what it is and what it can be-a great, good nation, on top of the world, the True North strong and free. Our government has been inspired by this vision from the beginning.

Today we step forward boldly, to realize it fully-hope for our children and grandchildren; opportunity for all Canadians; a prosperous future for our beloved country.

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Scott Clark and Peter DeVries As part of his pre-budget consultations, Mr. Flaherty asked Canadians for suggestions on how the Government could “better promote job creation and economic growth” and “what should Canada’s priorities be for the short-and long-term to encourage private sector growth and leadership in the economy.”

These are the right questions to ask. How he answers them in the 2012 budget, and in subsequent budgets, will be critical in determining the future performance of the Canadian economy.

Controlling the increase in debt must, of course, continue to be central to budget planning.

But it will not be enough.

A sustainable medium-term fiscal structure, one characterized by a stable or declining debt-toGDP ratio, will require a strengthening in the underlying growth potential of the economy.

This must be the primary focus of future budget planning.

Changing budget focus will necessitate fundamental changes to the Government’s fiscal structure (spending and taxes), so that it can better contribute to supporting savings and investment, to creating new technologies, to encouraging innovation, and to modernizing Canada’s infrastructure.

Our suggestions to Mr. Flaherty are aimed at this objective. But our suggestions for a change in budget focus are not meant just for the 2012 budget. They are meant to guide the government in planning a consistent budget strategy to be implemented in the 2012 budget and in the budgets beyond.

Although Canada is not in a fiscal crisis, the federal government, nevertheless, does face policy challenges that will require difficult policy and political decisions.

Ideology will need to be put aside; some previous budget decisions will need to be reversed; entrenched economic interests will have to be confronted; and, the government will need to become more transparent and accountable in its budget planning.

Our first suggestion is that the Government adopt a more prudent approach to budget planning, including a more realistic date for deficit elimination.

Just recently the International Monetary Fund (IMF) released an update of its October 2011 World Economic Outlook (WEO). [1] In its update the IMF concludes that: “The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated.”

Only three months ago the IMF forecast that the advanced economies would grow by 1.9 % in 2012 and 2.4 % in 2013. In its January Update the IMF has revised the forecast for 2012 down to 1.5 %, and for 2013 to 1.9%.

This revised forecast for the advanced economies, like that in the October 2011 WEO, is subject to significant downside risks.

For this outlook to emerge in the coming years, important policy actions must be taken. First, EU leaders must take credible actions to contain the EURO crisis; second, U.S. policy makers must come to an agreement on how to balance support for the economy in the short term, with the need for medium-term fiscal consolidation; and lastly, there can be no worsening, and preferably a reduction, in volatility in global financial markets.

The experience of the past year suggests that these policy decisions and outcomes will not likely be forthcoming.

Political dynamics and economic and institutional realities in the EU do not support an early or easy resolution to the EURO crisis.

The political situation in the US is also not that promising for compromise and needed policy change.

The U.S. has both a short-term problem of too little demand and

a long-term problem of too much debt.

Unfortunately, political institutions in the U.S. have become so paralyzed with divisiveness that the Administration and Congress are incapable of dealing with budget and economic problems.

With the Presidential election in 2012, there will be no major policy decisions until 2014 at best.

The U.S. economy could be entering a decade of below potential growth, which would ultimately drag potential growth down.

How will Canada fare in this uncertain and volatile global environment?

Much will depend on what Mr. Flaherty decides to do.

Canada is facing serious shortand long-term economic problems that will challenge the government’s ability to maintain a sustainable fiscal structure.

In the short term, economic growth will remain weak. Households are overburdened with debt, businesses are not investing despite record profits, because of widespread uncertainty, and all levels of governments are curtailing their spending and thereby acting as a drag on growth. The private sector has failed to step in to support the recovery as the stimulus has been removed.

The Minister of Finance will need a very credible budget strategy if he wants to convince the private sector to start using their growing liquidity balances to strengthen growth.

Coupled with a slowing export market, it is not surprising that international institutions, such as the OECD and the IMF, and even the economic forecasters that the Department of Finance consults, have reduced their forecasts of Canadian growth. In its January Update, the IMF revised down its forecast for economic growth for Canada from 1.9% to 1.7% in 2012, and from 2.5% to 2.0% in 2013. Even these forecasts are probably over optimistic, as there here is nothing but significant downside risks on the horizon.

It is well known that there will also be a slowing in Canada’s po-

Fiscal policy must be realistic. It should be based on sound analysis and a careful and balanced view of economic and fiscal prospects, challenges and risks. Fiscal policy should not be based on a “rosy” or unrealistic view of future economic and fiscal prospects.

tential economic growth in the coming years, in part because of demographic factors and in part because of Canada’s continuing poor productivity performance.

Potential economic growth is forecast to decline to around 2% in the second half of this decade from around 3% between 2000 and 2010.

This will have major implications for both federal and provincial budgets.

The government recognized the increase in economic uncertainty in the 2011 budget by including a risk adjustment factor to allow for forecast error. Right now there is a risk adjustment of $3.0 billion in 2011-12, $4.5 billion in 2012-13, $3.0 billion in 2013-14 and only $1.5 billion thereafter. At a minimum, the risk factor should be quadrupled in the outer years to $6 billion. But introducing greater prudence into budget planning would mean that the government would not hit its target of eliminating the deficit in 2015-16.

We believe that, given global and domestic economic uncertainties, the particular date of

deficit elimination is not that relevant. What is important is that the target date be set on the basis of a realistic assessment of economic prospects and a credible fiscal plan to get there.

What must be avoided are frequent revisions to deficit targets, as this will inevitably undermine budget credibility.

Our second suggestion is that the Government includes a Medium-Term Program Spending Target in the Budget.

Since 2006, the government has set out numerous fiscal targets.

These include the elimination of the total government sector (which includes federal, provincial, local and the Canada and Quebec Pension Plans) net debt; capping growth in program expenses (first total, then just direct program spending); a proposal to allocate higher-than-expected surpluses to the Canada Pension Plan; allowing interest savings from better-than-expected surpluses to reducing personal income taxes; and, reducing the federal debt-to-GDP ratio, etc. It is easy to get confused as to what the government’s real fiscal target is.

As the OECD has repeatedly pointed out, a credible fiscal target is one over which the government has a large element of control. This excludes deficit and debt type targets, as governments don’t control the economy and revenues. However, the government does have substantial control over program spending and this should become the focus of budget planning.

A program spending target would allow the automatic stabilizers to work, thereby excluding employment insurance benefits.

It would not be an annual anchor as this would be too disruptive to the effective management of government programs and operations. It should be a medium-term anchor, whereby over-spending in one year could be made up by under-spending in subsequent years.

We fully appreciate the politiTURN:

15 iPOLITICS BUDGET BRIEF

cal problems involved in setting a program-spending target. Most importantly, what would be the appropriate target level for program spending and what would this imply for transfers to the elderly, (i.e., Old Age Security and Guaranteed Income Supplement) since they are the only federal programs which are projected to increase faster than GDP in the longer term.

Our third suggestion is that the Government continue to review existing economic programs to ensure that they are relevant, cost effective and contribute to economic growth and job creation.

It will be important that the government show concrete actions to secure the $4 billion in annual expenditure savings. Nevertheless, we seriously doubt that this cut in program spending will be enough to achieve deficit elimination target in 2015-16.

We are also concerned by the emphasis that the government is placing on finding savings through “efficiency gains.” Serious expenditure savings can no longer be achieved through efficiency gains, although efforts must be made to ensure that programs are managed effectively and efficiently.

We would suggest the following actions to reduce spending: First, all spending programs should be subject to the original six Program Review tests on an ongoing basis. The results of these reviews should be made public and audited independently, by either the Office of the Auditor General or outside experts. If they do not meet the tests, they should be eliminated.

Second, get rid of regionally extended EI benefits and the ongoing employment insurance pilot projects– the former may need to be phased out over a period of time.

Third, the Public Service collective bargaining process needs to be brought into the 21st century. Collective bargaining should be comprehensive, including not only wages and salaries, but also pensions and other employee benefits. There should be a more equitable sharing of the pension costs between the government and plan members.

Fourth, performance and bilingual bonuses should be eliminated. Employees should not be paid extra for simply doing their job.

Fifth, get rid of all the regional development agencies.

Finally, cut defense spending by 10 %, or $2 billion annually.

We are sure these cuts would easily add up to $4 billion annually.

Our fourth suggestion is that the government undertakes a review of tax expenditures with the goal of simplifying the tax system.

Most importantly, the strategic spending review should be extended to tax expenditures – which are just spending, hidden in the tax system. This would require a major review of the personal and corporate tax systems to eliminate special tax preferences for individuals, sectors and industries that no longer serve any useful purpose. Studies have in fact shown that most of these tax expenditures are not effective.

The current personal and cor-

porate tax systems have become overly complex and inefficient.

When it comes The first income tax act was into adopting an troduced in 1917, as the Income War Tax Act, had only 11 pages. “unrealistic” view of Today, the Income Tax Act has 2800 pages including regulations economic and and commentary. It needs to be simplified. fiscal prospects, A recent study released by the Canadian General Accountants this has to be one of Association concluded that; ‘While the Personal Income the most unrealistic Tax System has incrementally evolved over the years, forecasts ever made its key structural elements and core underlying assumpby a Canadian tions have not been reconsidered for at least 20 years and, government. in some cases, for almost 40 years. During this time there have been significant changes in society and the economy, and no evaluation has been done to confirm whether the be used to support tax changes basic structure or targeted that would strengthen economic measures fairly reflect these growth and job creation. changing realities.”

The CGA report concludes that: “It would be extremely There have been few attempts valuable for the federal govat tax simplification and for good ernment to review the literreason. They come with signifially hundreds of targeted tax cant political risks, because it measures in the personal tax means eliminating special prefsystem to determine their relerences for groups, individuals, evancy and need …” industries, and sectors – preferEqually important is the need ences that can no longer be justi- to reform the Corporate Income fied. Issues of fairness will have to Tax (CIT) system, but probably be addressed in such a review. on a more selective basis. The CIT Interest in reforming and sim- system has undergone signifiplifying the personal income tax cant changes over the past twenty system has come mainly from years. Impediments to investeconomists, economic think ment have been removed (e.g., tanks, national organizations and the elimination of capital taxes), special interest groups. corporate tax rates have been reThe payoff of such a review, how- duced, and the capital cost allowever, would be substantial in both ance system has been improved. financial and economic terms.

Nevertheless, there are areas, A reasonable estimate would be (e.g., corporate reorganizations, annual savings of at least $5 bil- taxation and repatriation of forlion. These new resources could eign source income) which need

to be reviewed with the objective of simplifying the system and reducing the costs of compliance, which are not shared equally across sector.

The CGA report concludes that: “The benefits of tax simplification are clear. It means increased compliance rates and lower compliance costs for taxpayers. It means less paperwork for business and lower administration costs for government. It means a stronger system with a more secure tax base and predictable revenue.”

Our fifth suggestion is that the government implement a medium-term tax reform strategy, that supports savings, investment, job creation and economic growth.

We agree with the Government on the importance of lowering personal and corporate income taxes. There is no doubt that the Government has lowered taxes since coming to Office in 2006.

Most notable was the lowering of the GST by two points in 2006 and 2007. This reduced government revenues by about $13 billion annually and growing.

The government has also lowered corporate and personal income taxes. The corporate tax rate has been cut from 21 percent in 2006 to 15 percent in 2012. These reductions will cost the treasury roughly $10 billion annually and growing. Unfortunately, the corporate sector is not using the benefits of recent corporate tax cuts to make new investments.

In the case of personal income taxes, the government has reduced the lowest tax rate by 1 percentage point, increased the basic personal amount and increased

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the lowest two tax brackets.

However, the government has also chosen to provide special tax “preferences” for specific groups.

These include, special preferences to support participation in sports activities, arts and cultural activities, and groups such as volunteer firemen. In the 2011 election campaign you promised to provide special tax preferences for families with children over eighteen. These cost in the order of $1.5 billion a year.

On this basis, the government is quite correct to claim that it has provided lower taxes for some Canadians. What the government cannot claim is that this plan constitutes good tax policy that supports growth and job creation.

How could the government’s low tax plan be turned into good tax policy?

First, the current plan has only slightly reduced the high effective marginal tax rates imbedded in the personal income tax structure, which seriously inhibit labor force participation. Without getting into detail, what are required are an increase in the tax brackets and a reduction in tax rates. This could be expensive, but getting rid of the many targeted tax credits in the PIT system could help to finance a reduction in taxes for everyone, rather than select groups.

Second, the government should restore the two points to the GST bringing back the $13 billion that was lost. The government will probably reject this out of hand as being politically impossible.

We would urge the government to reconsider this recommendation in the context of the benefits of broader tax reform.

It would permit the government

to give an even larger cut in personal income taxes to all Canadians. In our view theses reforms to the tax system would be both good policy and good politics.

Third, EI employer/employee premiums should be eliminated.

The EI rate is a silent killer of jobs and a very regressive tax. The lost revenues could be sourced from increasing the GST rate and the corporate income general tax rate.

With these changes, the tax system would now have substantially lower personal and corporate tax rates and the elimination of EI premiums, offset by higher GST rates and tax simplification.

These tax reforms would support stronger economic growth and job creation.

The International Monetary Fund (IMF), in its latest Fiscal Monitor, stated “some of the adverse impact of fiscal consolidation on economic growth can be alleviated through reforms that shift part of the burden of taxation from labor to consumption”.

The House of Commons Standing Committee on Finance recommended a comprehensive review of the tax system by a blue ribbon panel. As this recommendation came from Government members, we would strongly recommend that this proposal be accepted.

Our sixth suggestion is that the government undertakes a commitment to modernize the infrastructure of the economy.

The government needs to do whatever it can to improve Canada’s lagging productivity performance. Tax simplification and tax reform will help.

There has been much written over the past years about

how productivity in Canada has lagged behind that in the U.S..

There has been a great deal also written about what might be causing this, and what to do to improve productivity. Nevertheless, despite all of the many policy changes introduced over the past decades to support productivity growth, there has been little improvement.

Nevertheless, we believe that investments to modernize our human (education, research, patents) infrastructure and our physical infrastructure will be critical. We would recommend that the expenditure savings be increased from $4 billion to $8 billion, and that this additional savings be reallocated to a new Infrastructure Modernization Program. Savings from reforming the tax credit for research and development could also be reallocated to this program.

Our seventh suggestion is that the government commit to a second temporary stimulus program were economic growth to weaken significantly in the short term.

As we said above, there are substantial downside risks to the global economy in 2012 and 2013.

Should economic growth weaken significantly in 2012, we believe the government has adequate fiscal flexibility to provide a second temporary stimulus program to support domestic demand.

Based on the results for the first seven months of the year, we believe that the underlying deficit for 2011-12 could come in around $28 billion and then decline further in 2012-13 to below $19 billion. Even allowing for the automatic stabilizers, an additional $20 billion in temporary stimulus over the two years could eas-

The minister of finance has said that the real focus of the budget will now be on growth and job creation. And he is right. The budget needs to set out a clear strategy to strengthen the underlying growth potential of the economy.

ily be accommodated. This could be included in the Infrastructure Modernization Program.

The credibility of the government’s fiscal plan would not be affected by providing a second round of temporary stimulus provided the government has a credible date for deficit elimination, a credible expenditure reduction plan, and a credible plan to strengthen economic growth.

Our final suggestion is that the government introduces greater transparency and accountability in its budget planning.

As we have argued on several occasions, it is time for the government to use its own economic forecast for budget planning and not the average of the private sector economic forecasts.

Why does the Minister of Finance continue to refuse to accept the fact that the Department of Fi-

nance has a better-forecast record than any of the 14 private sector forecasters that he consults? We understand the political attraction of being able to hide behind the private sector forecasters, but wouldn’t it be even better politically to get the forecast right?

The government should be more transparent in, and accountable for, the economic projections.

In the past, both Conservative and Liberal governments published detailed policy papers outlining the major economic, social and fiscal challenges facing the nation. These papers formed the basis for public discussions and policy initiatives. Ministers of Finance presented their Economic and Fall Updates to the House of Commons Standing Committee on Finance, explaining the economic and fiscal situations as a basis for pre-budget consultations. Senior Finance officials regularly appeared before the House of Commons and Senate Committees to explain the details of fiscal policy.

None of this has continued since the Government came to office in 2006. Although the government established the Parliamentary Budget Office (PBO) to provide independent analysis on the budget and spending, the government has dismissed the analysis coming from the PBO, without explanation or analysis.

The upcoming budget should include a discussion paper on the long-term challenges facing Canada and potential policy prescriptions to deal with the upcoming pressures. The analysis should not be restricted to the challenges facing the federal government, but should also contain an assessment of the fiscal sustainability of the provincial governments.

17 iPOLITICS BUDGET BRIEF

iPolitics webcasts iPolitics is pleased to host a series of panel discussions in which experts will explore a broad range of public policy issues. The webcast series is presented by iPolitics in collaboration with the University of Ottawa and iSi Global Webcasting and with financial support provided by the Canadian Medical Association and Certified General Accountants-Canada.

A timely talk about public pensions

Business Subsidies: A strategic investment or corporate welfare?

The role of tax expenditures in public finance

Red tape: Reducing the regulatory burden

Ever since the prime minister raised the question of the sustainability of our pension system during his recent speech in Davos, public policy commentators, politicians and media have been attempting to determine just what lay behind the statements.

While Prime Minister Harper’s desire to ensure that the retirement-income system (which includes the CPP, OAS and other elements) are sustainable demonstrates a laudable commitment to long-term fiscal responsibility, the PM’s comments have, among other things, provoked a debate over whether the looming “golden bubble” of retirees will necessitate reforms to the Old Age Security pension system.

We know that in 2010, 4.7 million people accessed OAS funding, at a cost of $36.5-billion to the treasury; by 2030, 9.3 million Canadians will receive the OAS, at a cost of $108-billion. With fewer people working to support an increasing number of retirees, the share of GDP taken up by OAS payments will increase. This puts the issue of generational fairness on the table. iPolitics explored the issue with the following panelists: Tyler Meredith, research director for the IRPP’s research in pension reform, labour market policy and international trade.

Jason Clemens, director of research and managing editor of the Macdonald-Laurier Institute.

Peter DeVries is a consultant in fiscal policy and public management issues. Over the course of 20 years, he held a number of senior positions in the Department of Finance, including Director of the Fiscal Policy Division.

On March 20th, the Honourable Gary Goodyear, Minister of State for Science and Technology, announced $34 million in funding toward six new R&D projects for the automotive sector. Government funding will makea up for more than half of the project investments at around $19 million in government funds; the other $15 million will be through industry partnerships.

While the auto industry is just one of many corporate areas that is heavily scrutinized for receiving economic assistance from the public purse, it provided a good starting point for our panel discussion. Experts in the field assessed the economic rationale behind government support to the private sector, and debated if subsidies are a strategic economic investment or a form of unsustainable corporate welfare. iPolitics explored the issue with the following panelists: Paul Ledwell, executive vice-president at Canada’s Public Policy Forum, where he leads the Forum’s work on innovation and public governance, and provides thought leadership in a number of policy areas, including health and labour force issues.

Leslie Shiell, assistant professor at the University of Ottawa in the Department of Economics, specializing in cost-benefit analysis and public policy.

Jeremy Leonard, research director at the Institute for Research on Public Policy. Currently he oversees the Institute’s Competitiveness, Productivity and Economic Growth research program.

Canada is now a global leader in the use of tax expenditures. Our uptake is more than 50 percent above the OECD average. As easy as they are to implement, political considerations usually make tax expenditures much more difficult to take away. On January 9, when Finance Canada issued its annual report on over $100 billion in tax expenditures almost no one noticed. While Parliament has a process to review regular spending, no similar system exists to review tax expenditures. In contrast to government programs, which are reviewed every five years to ensure relevance and effectiveness, tax expenditures are left to dangle.

Given that some would argue that reducing tax expenditures is akin to raising taxes, the federal government may be averse to eliminating certain tax expenditures as a means of reducing the deficit. But, at a minimum, if the poorly designed tax expenditures were eliminated or reduced, the government would clearly have more room to lower other taxes that have a bigger net impact. iPolitics explored the issue with the following panelists: Bob Plamondon, consultant and policy specialist with expertise in the fields of: governance; financial reporting and budgeting; public finance; tax policy; public policy; financial institutions; and financial leadership.

Sahir Khan, Director General, Expenditure and Revenue Analysis, Library of Parliament.

Serge Nadeau, Professor of Economics, University of Ottawa.

Finding the right balance between business efficiency and government regulation is not an easy solution. The latest examination of regulatory burden by The Red Tape Reduction Commission, established in January 2011, incorporated business stakeholders and consultations to help identify where improvements could be made to the Canadian regulatory system. In January 2012 the Commission published its findings and found many regulations have hindered business growth and competition. The Report suggested making long-term and sustainable changes, but what exactly needs to be done?

Some of the questions explored by our panel included: • What does red tape mean for small to medium size companies in particular, and what are the greatest challenges when trying to start or grow a business?

• What are the greatest challenges that need to be addressed in 2012? What is the next step forward, and how can we get there? iPolitics explored the issue with the following panelists: Carole Presseault, vice-president, government and regulatory affairs for the Certified General Accountants Association of Canada, and has been a public affairs professional for more than 25 years.

Corinne Pohlmann, is vice-president, National Affairs for the Canadian Federation of Independent Business (CFIB), a notfor-profit organization representing more than 108,000 small and medium-sized business members across Canada.

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