iPolitics e-book: Budget 2012

March 29, 2012

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Kyle Hamilton/iPOLITICS

Finance Minister Jim Flaherty says government cuts will be ‘modest,’ though he has yet to define what that means

What to expect in the 2012 budget Eric Beauchesne Thursday’s budget will be the first crafted by a Harper government with a majority. Given that governments like to get bad news out of the way early in their mandate, it is “expected to be relatively tough,” analysts at BMO Capital Markets warn.

It’s going to be especially tough on public servants, thousands of whom are expected to see their jobs disappear as a result of the sweeping second strategic spending review, and on Canadians born after 1955, who will be told they are going to have to work longer for less to help support that giant cohort of retired baby boomers.

“Finance Minister Jim Flaherty has indicated that it won’t be draconian, the BMO analysts note.

“However, it is expected to mark a 180-degree turn from the stimulus of three years ago,” including $8 billion in “savings” by 2015, double last year’s budget goal, and the raising of the qualifying age for Old Age Security to 67

from 65 by 2020.

Statistics Canada will wrap up the bad-news week Friday with its January economic report card, which analyst s project will show a stagnant or worse performance.

“A 0.1 per cent decline ... should corroborate the message from the recent job, retail sales and other surveys that the economy started the year on a soft note,” says CIBC World Markets economist Peter Buchanan. The expected weak January report suggests the annual pace of growth in the first quarter will be just 1.8 per cent, which is well below CIBC’s earlier 2.4 projection.

The “suddenly sputtering” Canadian economy, notes BMO economist Douglas Porter, is despite new growth in Canada’s main export market the U.S., where building permits have now hit a three-year high and jobless insurance claims at their lowest in four years.

In contrast, Canadian manufacturing and exports are now struggling, while there’s been no job growth over the past half year

and no real increase in wages for two years.

“Moreover, the labour markets distress signals are growing a bit louder,” Porter warns, noting the recent wave of layoff announcements and increasing labour unrest.

“Coupled with lacklustre job growth, wage increases are also struggling in Canada, heavily dampening real incomes,” he says, noting that hourly earnings are up just two per cent over the past year while inflation is running at 2.6 per cent. “The gap between inflation and wages partly explains why labour unrest is ramping up.”

The January “payroll employment, earnings and hours” report, also being released Friday with the GDP report, is not expected to show any improvement in wages.

While the federal and provincial budgets will contain bitter medicine for many, they will all stress that the measures will lead to better times for all, and will include federal budget incen-

tives for Canadians to save more on their own for their retirement and for businesses to invest more in commercial research and development.

“A key budget theme is likely to be fostering innovation and productivity, the latter an ongoing issue for Canada,” says Mary Webb, economist at Scotia Economics, which notes the budget is expected to include incentives to encourage more business investment in research and development.

The federal budget is also expected to report that the deficit for the year just ending will be about $27 billion or nearly $5 billion less than projected, and that the government is easily on track to meet or beat its goal of balancing the budget by mid-decade.

That the deficit is already declining as projected while the economy is struggling should, meanwhile, arm new NDP leader Thomas Mulcair with ready-tofire ammunition for the Official Opposition to launch its attack on the budget.

The budget is going to be especially tough on public servants, thousands of whom are expected to see their jobs disappear as a result of the sweeping second strategic spending review.

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3 March 29, 2012 | iPolitics.ca

Lower deficit, stronger economy offer Flaherty budget flexibility Julian Beltrame/The Canadaian Press Finance Minister Jim Flaherty has won some fiscal flexibility and an elevated level of comfort on the eve of Thursday’s budget, with some suggesting Ottawa might be able to eliminate the deficit before the next election.

The question is whether Flaherty will use the unexpected bounty to curtail some of the more extreme calls for austerity coming from elements of his party and cabinet.

Last week, the minister stressed that government cutbacks — expected to range between $4 billion and $8 billion above previously announced measures — will be “modest,” but did not define the term.

In a new paper Monday, the Royal Bank said the better fiscal track reduces the need for overly aggressive action and that Ottawa would be able to eliminate the deficit one year, perhaps even two years, prior to its 2016-17 target, while still keeping cuts at the low end of the range.

“The $4-billion mark is now likely, given that we are tracking well ahead of plan,” said Craig Wright, RBC’s chief economist.

“Although this will allay some of the earlier fears of extreme austerity, holding spending growth to a slower path will still imply some components of government could still potentially see outright declines,” he added.

Some of the savings could be “re-allocated” to high-priority new initiatives, such as improving Canada’s productivity record.

Signals sent by Flaherty, the prime minister and other ministers point to the upcoming budget being a transformational document, with an eye to the aging baby boomer generation just entering retirement years, rather than something focused on the next year.

There will almost certainly be no new major tax reductions, Ottawa having already fulfilled its goal of taking the corporate rate to 15 per cent.

The budget is expected to usher in long-term changes to Old Age Security, including raising age of entitlement to 67 from 65; a new approach to funding research and development to improve productivity; relaxing the environmental review processes to speed up resource development; and trimming the size of government

by about 30,000 workers.

On the fiscal issue, Ottawa has already tackled a major budget headache by capping future health-care transfers to the growth in the economy, meaning its commitment in the key service will climb roughly in tandem with revenues.

Wright estimates the anticipated change to OAS has the potential to save Ottawa $8 billion in 2020 — the first year of likely implementation — rising to $30 billion annually by 2040.

And Flaherty is already well ahead of the game in terms of his quest to return to balance around the next time the Conservatives will have to face the electorate in October of 2015.

That would not only buttress the Harper Conservatives’ boast of being good economic stewards, but allow them to fulfil two highprofile election pledges made last spring. During the campaign, he promised the government would bring in limited income-splitting and double the limit on tax-free savings accounts to $10,000 once the deficit is eliminated.

The RBC analysis shows the government’s deficit could be eliminated in 2015-16, or even for

the 2014-15 fiscal year.

The bank notes that the first nine months of the current fiscal year shows the deficit will likely be about $25 billion — and could be as low as $20 billion — well south of the $31 billion Ottawa had calculated in November.

With three-quarters of the year’s numbers in, government revenues have been coming in above expectations, while expenses have been well below.

“If nothing changes in the final three months, then you could get in around that $20-billion mark, but there are still economic uncertainties out there,” explained Wright, for favouring the conservative estimate.

When the minister met economists earlier this month, they advised him that the risks to the global recovery had diminished, mostly because Europe had begun dealing with its debt crisis and U.S. growth had resumed.

Since then, they have told Flaherty to plan for the economy growing by 2.1 per cent this year and 2.4 per cent next year.

While risks remain, Wright said they have diminished. It’s almost certain Flaherty won’t need the $3 billion he put on reserve dur-

the canadian press

ing this year, which means it’ll come off the deficit bottom line.

With the risk of a reversal of fortune lessening, the $4.5-billion reserve for the 2012-13 fiscal period also appears to be icing on Flaherty’s fiscal cake.

The importance of the past year’s better-than-planned-for performance is that the government’s books begin subsequent years closer to the balance, sort of like starting a 100-metre race from the 10-metre point.

“It’s still very unlikely they could beat their balanced budget target by two years, but it is within the realm of possibility if all lot of things go well,” agreed economist Douglas Porter of the Bank of Montreal.

Porter said the deficit is becoming less of a concern for Ottawa, which will likely use Thursday’s budget to set out a path for the future. He notes the critical debt-toGDP ratio, already the best in the Group of Seven big economies, is on a downward trajectory.

“This budget will be more about setting priorities over the medium and long term,” he said. “Frankly, Canada’s fiscal situation at the federal level isn’t much of an issue for the financial markets.”

4 March 29, 2012 | iPolitics.ca

iPolitics Special Report

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.

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.”

How can we judge Jim Flaherty’s budget? Turns out there are lots of ways Scott Clark and Peter DeVries Who decides whether fiscal policy is credible and on what basis do they decide? In our experience, governments usually seek the approval of their fiscal policies from four key groups.

First, governments seek the approval of financial markets because their approval will be critical in determining the cost of borrowing for the government, as well as for other borrowers in the economy.

Currently financial markets are not concerned about Canadian fiscal policy at least at the federal level. Bond yields are extremely low and Canada has a triple-A rating. Part of the reason for this is the very high level of credibility that the Canada earned with the elimination of the deficit in the 1990s, followed by a long period of surpluses and declining debt.

The Conservative government has been able to take advantage of this legacy despite the emergence of a deficit in 2009, because of its commitment to a sustainable medium term fiscal framework.

At the same time, Canada’s fiscal situation continues to be the best in the G-7. Canada also experienced a mild recession in 20092010 compared to other countries and Canada’s financial sector performed very well compared to financial institutions in other G-7 countries. These developments have helped maintain Canada’s fiscal credibility reputation internationally. Most importantly financial markets are simply more

focused on the debt crisis in Europe.

Second, governments seek the approval of important stakeholder groups, representing business, labor, consumers and educational institutions to mention only a few. This is done through extensive pre-and post-budget consultations. They are important because it is these sectors that will make the decisions that will affect investment, output, and employment.

They also represent the “talking heads” that the media will consult for their opinions and. They can significantly affect public opinion by their reaction to government policies.

Third, governments also seek the approval of the media, both domestic and international, because the media is critical in shaping public opinion. If initial media reaction is negative, then it could be difficult to change their observations and conclusions.

Fourth, but definitively not last, governments must seek the approval of the general public. They must carefully explain why action is necessary, the nature of the actions being considered, and how such actions affect them.

The public must be convinced that actions are necessary, that they are equitable and that they will lead to long-term benefits, even though there may be shortterm pain. In some cases, the public may be ahead of the government in demanding credible fiscal actions to control the buildup of debt.

What do these groups consider in deciding if fiscal policy is “disciplined” or “credible”?

First, fiscal policy must be realistic. By that we mean fiscal policy 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.

Second, fiscal policy must be responsible. This means the government must be committed to establishing and maintaining a sustainable medium-term fiscal framework, one that supports long-run economic growth through control of public debt.

A sustainable fiscal framework is one in which the debt-to-GDP ratio is either stable or declining.

Such a framework should be able accommodate temporary fiscal actions taken to stimulate aggregate demand and cushion fluctuations in output, provided these actions do not lead to permanent structural imbalances and a rising public sector debt burden in the medium term.

Third, fiscal policy must be prudent by including a reasonable amount of “insurance” to guard against forecast error, and the impact of unforeseen events and policy actions.

Finally, fiscal policy must be transparent. This means providing full disclosure of analysis and information, since without this, governments cannot be held accountable. Such analysis should

Will the budget take a ‘realistic’ view of economic and fiscal prospects? not be restricted to the current planning period, but identify potential risks in the future.

What should we look for in judging the credibility of the 2012 budget?

Will the 2012 Budget take a “realistic” view of economic and fiscal prospects?

The government does not have a good record when it comes to realistic economic assumptions.

The minister of finance, in his November 2008 Economic and Fiscal Update, produced a fiscal forecast showing surpluses as far as the eye could see. When it comes to adopting an “unrealistic” view of economic and fiscal prospects, this has to be one of the most unrealistic forecasts ever made by a Canadian government.

For the 2012 budget, the government is faced with a very difficult economic outlook, both internationally and domestically. The EU is in recession and the only question is how deep and how long it will be. The EURO Area (EA) is going through major adjustments and the very existence of the EA in its current form is in serious doubt. Whatever the outcome, it will take decades or longer for

the adjustments to resolve themselves.

There are signs of some recovery in the U.S. economy but the consensus is that the U.S. economy is likely to undergo a decade of lost growth and high unemployment. It will take years for the U.S. to resolve its deficit and debt problems.

Canada is also facing serious economic challenges, in the short term, the medium term, and the longer term. Households are overburdened with debt, businesses are not investing, despite record profits, because of the global and domestic uncertainties, 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.

Coupled with a slowing export market, it is not surprising that forecasts of Canadian growth have been reduced by international institutions, such as the OECD and the IMF, and even by the economic forecasters that the Department of Finance consults.

There is nothing but significant downside risks on the horizon.

How the budget reflects these international and domestic developments and uncertainties will be key in determining its credibility.

Will the budget take “responsible” policy actions to ensure a sustainable fiscal framework?

Sustainability means that the government is prepared to take judging the credibility: PAGE 5

5 March 29, 2012 | iPolitics.ca

What should we look for in judging the credibility of the 2012 budget?

FROM PAGE 4

the policy actions needed to ensure that the debt burden of the government is stable and, even better, declining.

This should be easy because the government already has a sustainable fiscal framework.

Based on the government’s own numbers the debt-to-GDP ratio will decline over the period to 2015-16. With the unilateral announcement that the growth of the Canadian Health Transfer will be held to the growth of GDP, the PBO has concluded that the debt ratio will continue to decline to the year 2020.

Contributing to this sustainable fiscal framework are the $4 billion in annual expenditure cuts that the government has been attempting to identify for the past 10 months. After months of conditioning the public that major cuts (possibly $8 billion a year) could be expected, the government is now saying they will be “moderate” and that most job losses will be the result of attrition. The government appears confused on why to cut, how much to cut, and when to cut.

In fact the minister of finance has now said that the budget will not include details of the cuts.

This would mean that Parliament would be asked to approve a budget without details on the expenditure cuts. The details will be included in Part III of the Main Estimates, which would not be tabled in Parliament until May. This would leave only one month for Parliament to review and approve Departmental spending.

This confusion, lack of information and transparency will seriously undermine the credibility of the budget and the Minister of Finance.

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.

It is an accepted fact that potential economic growth is slowing as the population ages and employment growth declines. Productivity growth continues to slow.

The government needs to address the key question of how to promote savings and investment, innovation and technological advancement. This will be the real test of the government’s budget credibility.

Will the government adopt a prudent approach to budget planning?

We would describe a fiscal plan as prudent if the plan includes adequate “insurance” against unforeseen events and inevitable

forecasting error. The purpose of the “insurance” is to protect the fiscal targets as much as possible and to give confidence to financial markets and stakeholders that the targets will be achieved.

This enhances the credibility of the fiscal plan.

In the mid-1990s, prudence was important to enhance the credibility of the annual fiscal targets.

With the emergence of balance budgets and increasing surpluses, the need for prudence became less evident. However, prudence was still required to ensure that the current year point-estimate deficit target would be met without having to take in-year action, which could be extremely disruptive to departmental planning.

The government has recognized the risks in economic forecasting and a small economic prudence factor was included in the 2009 budget. This was removed in the 2010 budget, but was re-introduced in the 2011 budget. The adjustment for risk amounted to a downward adjustment of only $1.5 billion in fiscal revenues in each year of the forecast. In the November 2011 Update, this adjustment for risk was increased to $3.0 billion for 2011-12, $4.5 billion for 2012-13, $3.0 billion for 2013-14 but only $1.5 billion for each year thereafter.

An allowance for risk in the economic outlook of $1.5 billion is only about one-quarter of the allowance made by the previous government during a period when the economy was much smaller. The 2005 budget, for example, included prudence increasing to $7 billion in the fifth year of the forecast, equivalent to 4 per cent of total government revenues.

Given the significant uncertainties both globally and domestically a prudent approach to budget planning would require a substantial increase in the prudence adjustment that the budget, one that rises over time rather than falls.

This would increase the credibility of the budget. The tradeoff is that it would mean delaying the target year for deficit elimination.

Will the government adopt a transparent approach to budget planning?

At the present time, budget planning lacks transparency.

This has not always been the case.

This is unfortunate given that the government was elected on a commitment to improve both transparency and accountability.

Conservative and Liberal governments in the 1980s and 1990s provided numerous policy discussion papers for public discussion and debate. The Mulroney

government in 1984 and the Chrétien government in 1994 published detailed outlines of the economic growth agendas that they intended to pursue. It was common for budgets to include detailed policy analysis.

Regrettably the government has chosen not to follow this approach to policy making. This surprising since the creation of the PBO was the result of a commitment made by the Conservative government during the 2006 election to promote greater “transparency and accountability” in budget planning. This has not been the case.

Since its creation, PBO has been in a constant battle with the government over its independence, inadequate budget, and lack of staff. In addition the government has denied the PBO access to data that it needs to do its work.

The latest example of this is the claim by the government the Old Age Security (OAS) retirement program was not “sustainable”.

The PBO issued a report that concluded that, allowing for the decision by the government to hold the growth of the CHT to growth of nominal GDP, OAS is in fact “sustainable. In other words even without changing the age of eligibility for OAS the government’s debt burden would decline.

You would think that the minister of finance would be happy with conclusion since it supports the government’s claim the they are good fiscal managers. Instead the Minister of Finance accused PBO of being “unbelievable, unreliable, and incredible” even though he was unwilling or unable to provide the government’s own analysis and projections.

PBO has asked that the government make its projections public.

The transparency record of the government could be improved if it released two documents in the budget or at least detailed analysis. First, given the focus that the government is now putting on an ageing population, the government should release a paper that reviews all the consequences of an ageing population (not just sustainability) and the policy changes that may need to be considered. This should be done not only for the federal government but for the total government sector.

A second, given that the priority of the 2012 budget, and hopefully future budgets, will be strengthening economic growth and job creation, the government should provide a detailed blueprint on how it plans to proceed in the coming years.

Transparency and accountability are key to good policy making and fiscal credibility.

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

March 16: Why Flaherty gets an ‘F’ for transparency

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

What the 2012 budget has to do

March 20: What comes next?

6 March 29, 2012 | iPolitics.ca

The problem with pensions is politics Adam Goldenberg Colin Carrie was standing mere feet from Jim Flaherty when the Finance Minister peeled back the latest layer of the government’s plans for Old Age Security, on Friday.

“This is not for tomorrow morning,” said Flaherty. “This is for 2020, 2025.”

Unfortunately for Carrie, the Member of Parliament for Oshawa, 2025 may come too soon; that’s the year he turns 65. Thank goodness for MP pensions.

But other not-quite-seniors may not be so lucky. We don’t know yet, and neither, it seems, does Colin Carrie. The Conservatives seem keen to slacken the social safety net, but the specifics are only just beginning to seep out.

It has been a slow striptease, beset by partisan squabbling — “debate” would be too generous a description — and the rancour of our politics is to blame. Ottawa has become too small for big issues; every decision is bedevilled by its details. In this age of spin, our leaders are too timid to tempt the third rail. And so they delay, dither, and deny. Eventually, the public will pay the price for their procrastination.

Of course, the Conservatives are largely responsible for the sorry state of our democratic debate.

For nearly a decade, Harper and his team have taken their opponents out of context at every turn.

They’ve pounced wherever plausible. They’ve played to win, and win they have.

Now, however, the shoe is on the other foot. At the World Economic Forum in Davos, Switzerland, in late January, the Prime Minister may or may not have suggested that his government

may or may not do something — somehow, sometime — to reduce spending on public pensions. The opposition parties swiftly let slip the guns of war.

For the Liberals and the NDP, defending OAS is easy politics.

Seniors swing elections, and seniors in poverty blight our society. Harper may well be punished in the polls for his proposed parsimony. But such political consequences reflect a much more dangerous dilemma. The Conservatives have yet to propose any actual changes to OAS, but the other parties didn’t need details to lose their cool. Their hyperbolic reaction to even the possibility of pension changes makes clear why hard choices are so rarely made in our politics; when difficult decisions entail winners and losers, politicians tend to end among the latter.

But here we face a basic question of democratic trust: how do we, as a society, make and keep commitments to ourselves over time? Pensions policy is a choice between generations, of promises kept and broken. Keeping our word to aging baby boomers may mean breaking it to their grandchildren.

We elect our MPs to make these hard choices. But when we punish them for doing so — by appealing to anxiety and ratcheting up rhetoric — we suck legitimacy out of our politics. Bob Rae is right: in the last election, Stephen Harper failed to mention any plans to prune pensions.

But consider the reaction when he finally broke his silence; can you really blame him for taking so long?

Yes, during the 2006 election campaign, Harper promised to “fully preserve the Old Age Secu-

rity,” as well as “all projected future increases.” But that was before he squandered a $13 billion budget surplus on tax breaks and spending sprees, sending the country into deficit before the recession began. That was then, this is now: Harper may have built the bridge to fiscal shortfall, but the red ink is already under it.

The issue is now one of fairness.

It hardly seems fair to ask today’s seniors to pay for their parents’ fertility. But is it really any fairer to ask younger workers to give up some of their own retirement benefits, while their taxes pay for their parents’?

Our democratic process is supposed to settle these trade-offs justly, at the polls. But difficult questions rarely survive the sound bites of our election campaigns. And so our democracy has become a public spectacle, and justice between generations becomes a battle between talking points. Canadians are cheated of the fulsome debate that our future deserves.

It’s unreasonable to expect a government to do nothing but what they said they would during the last election. Don’t believe me? Ask Bob Rae. Wiggle room is a fact of any democracy; voters may pass judgment at the next election. But if Canadians want more than after-the-fact accountability — if we want to have a real say in how our country is governed, in advance — then we have to stop rewarding politicians who practice the scorched-earth politics of spin.

Because for those of us who plan to retire after Jim Flaherty’s “2020, 2025” deadline, after-thefact accountability may not come soon enough.

Kyle Hamilton/iPOLITICS

7 March 29, 2012 | iPolitics.ca

The looming crisis of public sector pension shortfalls Bill Tufts

S

ome suggest that a discussion to rein in public sector pensions is nothing but a propaganda war. Many defenders of public sector pensions resort to emotional rhetoric to create controversy and make the issues a divisive one. Public sector employee pension plans are hundreds of billions of dollars short and clear headed decisions need to be made to fix them.

The country’s leading economic think tanks, business lobby groups and numerous politicians being assailed by pension shortfalls, suggest a reasoned approach needs to be taken. Rather than generating propaganda or divisive comments on the issue, a balanced approach is one that attempts to examine the issue based solely on the facts and analyzes the situation from an objective point of view.

The public and politicians are confused enough by the pension issue, so let’s approach it with a rational investigation rather than heated emotion designed to protect one point of view. Both sides of the debate on pensions need to put aside long held half-truths and the accompanying myths that have developed over time.

Bold statements that public sector pension critics are creating a “big lie” should be backed up with some sort of facts. Many times in the discussion facts are omitted at the expense of dogma. All positions should bring the facts to the table in a “truth in numbers” exercise.

It is hard to point fingers at the cause of the crisis in defined benefit (DB) pensions. We call it a crisis and the definition of crisis from the Oxford Dictionary is ” a turning point … when an important change takes place, indicating either recovery or death”. This is appropriate to describe pen-

sions in Canada.

Finger pointing is not of much value. Was it politicians who gave away generous benefits such as early retirement for short term political gains? Did employees and their unions demand unrealistic final salary pensions?

Was it actuaries who used poorlyfounded assumptions to avoid heftier contribution rates or trustees who allowed pension boosts and contribution holidays?

At this point it does not matter where the blame lies. Public sector defined benefit plans carry big risks and the bulk of the risk falls onto the shoulders of taxpayers.

The CD Howe Institute suggests market bond yields should be used for pension calculations.

Unfortunately even these numbers may prove to be too generous. Let us hope that we are not in a Japanese style period of market returns that fall substantially over time. Some current benchmark indicators are not too comforting.

As examples, the TSX 5 year rate of return is – 1.5%, the S&P 500 10 year return is a total of 12.5% (1.25% per year) and the long term bond rates is well under 3%. This is not a good place to be for pensions counting on 6.5% to 7.5% returns to adequately fund themselves.

To take the view that just because we have seen solid market returns in the 1990s and that markets will return soon is a very dangerous proposition.

Now is not the time for pension actuaries, sponsors and trustees to predict future stock markets, they need to deal with the reality of pensions without the artificial aid of stock markets going to the moon. One study done by the Federal Reserve Bank of San Francisco shows us the risk, suggesting that as a result of the same demographic trends afflict-

ing pensions “real stock prices are not expected to return to their 2010 level until 2027.

Yes, the major problems for pensions were created by a stock market meltdown in 2008. Since that time pension liabilities have continued to grow and stock markets have been flat. The TSX for example, would have to grow by 15% just to get back to pre-2008 levels. But in the meantime pensions have accumulated another three years of liabilities based on returns that did not happen.

Stock markets would have to almost double to fully fund current pension liabilities.

We cannot expect that public sector unions will take the steps required to control the costs of pensions to taxpayers. In theory there may be a joint liability between taxpayers and employees for risk and pension shortfalls but politicians have not demanded accountability and the unions have not accepted any responsibility. Governments have stated they have a “moral obligation” to

fund these plans which means sorry for taxpayers, who will be on the hook.

Some of the more notable examples include Saskatchewan Teachers Superannuation where taxpayers have a “moral obligation” to the tune of a $4.5 billion shortfall. In 2011, Nova Scotia taxpayers felt sorry for public employees and pumped half a billion dollars — or $17,000 per plan member — into the Public Service Superannuation plan. With the result of last year’s markets the plan will be about the same as it was before the generous bailout.

In British Columbia the WorksafeBC Pension Plan took a charity bailout from taxpayers to the tune of $28,000 per employee last year.

Despite the considerable confidence in public sector employee pensions expressed by union leaders, many are not feeling as confident as them. The mayor of St John New Brunswick worries that “we’d be losing a lot of jobs and the scenarios are ter-

rible if you consider the cuts in services that would have to take place if the province doesn’t allow us to make these changes [to pensions]”. Pensions in the City of Montreal eat up 13% of city revenue and the total cost has increased from $130 million annually to over $600 million this year. It was not a frivolous matter when the House of Commons Finance Committee called for a federal public sector pension review.

Nor was it a minor issue when, in recent budget deliberations, the Finance Minister of Newfoundland expressed concerns over pensions that rise at a rate of $500 to $600 million per year. Pensions now represent 66% of Newfoundland’s net debt.

Hiding in the trenches while pension landmines are exploding all around will not do anything to resolve the dilemma of public sector pensions. It is time for leaders to step forward and find solutions that are fair for both public sector employees and taxpayers.

8 March 29, 2012 | iPolitics.ca

How to achieve an inter-generationally fair public pension system Michael Wolfson What is generational fairness anyway?

The last time Canada’s Parliament seriously grappled with this question was during the Special Parliamentary Committee on Pension Reform in 1983. Yes, there have been ad hoc increases to the Guaranteed Income Supplement (GIS) since then; the Old Age Security (OAS) claw back was introduced in 1989; and there was a significant increase in Canada (and Quebec) Pension Plan (C/QPP) contribution rates in the mid 1990s. But all of these changes were piecemeal — none addressed Canada’s public pension system as a whole.

In contrast, the Special Parliamentary Committee in 1983 – made up of dedicated back bench members from all three of the parties then represented in Parliament – devoted a full year to hearing witnesses, holding extensive in camera discussion and debate, and eventually produced an entire chapter on “Intergenerational Fairness.”

As a policy analyst working with the research staff of this

Committee, it was a wonderful experience to hear and help inform these discussions. While the members brought their own diverse political perspectives, the discussions were polite, engaged and thoughtful. All members recognized that intergenerational fairness was fundamental to the long term sustainability of public pension programs. It was also clear to all that pension arrangements necessarily involve inter-generation transfers.

It is a fiction to believe that any public pension arrangement can be financed purely by each generation setting aside the funds for its own future benefits.

Many think of their RRSPs as a pure example of each person providing for their own retirement income. But this ignores the important income tax incentives in place to encourage RRSP savings. And we cannot simply apply the analogy of individual saving for retirement to society as a whole. For example, higher payroll taxes today to fund future pension payouts from the C/ QPP will have broader impacts on the economy (possibly discouraging small businesses in

hiring, and more generally reducing consumers’ overall purchasing power, hence aggregate demand).

The Committee therefore chose to ground its thinking in basic principles. A clear majority of Canadians of all ages and all socio-economic backgrounds had to be comfortable that one generation or group was not taking advantage of any other, for example by creating a huge burden on their children. Another general principle was that one generation should not be promising itself a pension in the future that was better than what it was prepared to provide to the elderly while it was in its working age years.

As the Committee grappled with these different principles, a key question was how they should be operationalized in practical and understandable legislation. In the end, the Committee unanimously agreed to recommend a change in the way public pension arrangements were indexed. A breakthrough moment during in camera discussions revolved on whether pensions should ever actually decrease from one year to the

next.

The metaphor that clinched the Committee’s agreement was that of a 19th century rural extended family. All members agreed that in “fat years,” when harvests were abundant, everyone should share in the bounty, including those around the table who were too old and frail to have contributed much to the actual farm work.

But in “lean years,” when there was not so much to go around, everyone should also share in the necessary belt-tightening.

Based on this shared understanding of intergenerational fairness, the Committee’s recommendation was for an indexing system that took account of the ratio of people age 65+ to those of working age, the unemployment rate, and whether overall economic growth – after taking account of inflation – was weak or strong.

When these factors were favourable, indexing would be more than the inflation rate. And when factors were not favourable, indexing would be less.

This indexing would be applied not only to OAS and GIS, and to C/QPP, but also to other parts of

It is a fiction to believe that any public pension arrangement can be financed purely by each generation setting aside the funds for its own future benefits

the retirement income system like the tax limits for RRSPs and workplace pensions.

Wouldn’t it be wonderful if Minister Finley, in her latest comments on OAS to the Canadian public, could avoid fanning the flames of inter-generational conflict, and instead point Canadians to a more thoughtful and fuller discussion of the real issues involved in assuring an intergenerationally fair public pension system?

Only then, can the real discussion begin.

OAS cuts could cost provinces millions while increasing poverty rate among seniors Michael Wolfson The federal government has recently been floating one sentence options for cutting the Old Age Security (OAS) program – causing a media flurry, and heated public debate. The only details provided to date indicate that changes would focus on those aged 65 and 66, and that it would not be implemented until sometime after 2020.

But what would have happened if the proposed government changes to OAS had been fully implemented in 2011? That is, what if OAS would not have been paid at all to 65 and 66 year olds last year, assuming the Guaranteed Income Supplement (GIS) – the income tested benefit that is part of OAS legislation – remained unchanged?

This is an important question to ask, since the primary reason provided by the government for cuts to OAS is to make the program more fiscally sustainable – to save money, in other words.

But OAS is only a part of Can-

ada’s retirement income system that includes other major programs and tax provisions, so cutting OAS would cause ripples throughout the system. Creating a hypothetical scenario helps to see how far the ripples from the cuts might reach.

Since the federal government is short on details, I have used Statistics Canada’s Social Policy Simulation Database and Model, and my own assumptions to create the calculations and interpretation of the results.

If OAS had been denied to all 65 and 66 year olds in 2011, the overall costs of OAS would have dropped by about $4 billion. But because OAS is included in taxable income, there would also have been a drop of roughly $500 million in federal income taxes and a $300 million decline in provincial income taxes.

Further, because these seniors (the 65 and 66 year olds) would have lower disposable incomes and hence less money to spend, there would be over a $100 million drop in federal GST and

almost a $200 million drop in provincial sales and other commodity taxes and health premiums.

The bottom line: the net fiscal impact of such a cut to OAS, in 2011 terms, would be a fiscal savings for the federal government of about $3.5 billion, but combined with a $500 million loss in tax revenue for the provinces.

Further, the almost 700,000 seniors age 65 and 66 would also have had reduced incomes unless they compensated – for example, by working more, or drawing down more of their savings, or moving in with relatives. If they didn’t, the number of 65 and 66 year old Canadians falling below Statistics Canada’s after-tax Low Income Measure (LIM) would have more than doubled from about 50,000 to almost 120,000 (with a further 15,000 in their sixties but not exactly age 65 or 66).

Such an increase in low income rates – most analysts refer to them as “poverty” rates – would likely be offset, at least in part, as many of these seniors would go

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onto provincial social assistance programs. Federal cuts in OAS would be shifting costs to the provinces, in other words.

To avoid hurting the poor, the government could offset the cut in OAS for those with lower incomes by increasing GIS benefits by a corresponding amount.

But this change would dramatically reduce the fiscal savings for the federal government to about $500 million, taking into account changes in lost federal income tax and GST revenues. The provinces would still lose about $350 million because non-taxable GIS benefits would be substituted for taxable OAS benefits.

So what is the federal government going to do?

Will the cut in OAS save billions in federal spending, while shifting hundreds of millions in revenue losses to the provinces, and more than doubling the poverty rate among affected seniors?

That’s what the 2011 hypothetical scenario indicates would happen.

Or will the cut – with a possible modified GIS – protect the most

vulnerable seniors, but save far less for the federal government, and still hit the provinces with large revenue losses?

This would mean that the net effect on the fiscal balances of both levels of government combined – what ultimately matters to taxpayers and the economy – would be essentially nil.

On March 29th, the federal government will table the budget and we will see if and how crucial details of the OAS cuts will be addressed. Let’s hope the government does not choose to reverse one of Canada’s greatest social policy successes of the last half century and increase poverty rates among Canada’s seniors.

Let’s also hope they don’t choose to shift hundreds of millions of fiscal burdens to the provinces in the name of improving their own fiscal situation. And let’s hope they will not approach public policy with a narrow focus that pays no attention to the realities of a shared jurisdiction and the complexity of programs forming Canada’s retirement income system.

9 March 29, 2012 | iPolitics.ca

Canada’s outdated regulatory system impedes competitiveness Perrin Beatty As the federal government approaches its first budget with a parliamentary majority, it has to confront Canada’s inefficient and outdated regulatory processes.

The delays and duplications that major projects have to overcome today can simply smother them, even when the benefits to the public would be tremendous.

Last year the federal government’s Red Tape Reduction Commission heard from a Calgary promoter who told them he needed 10 permits from 21 organizations to develop a wind farm. The whole effort took two years, by which time some of the technologies employed in the project were out of date.

The Canadian Chamber of Commerce has identified our cumbersome regulatory system as one of the top 10 barriers to Canadian competitiveness. The added delays and costs imposed by the overcomplicated process dull our competitive edge in global markets and place Canada’s standard of living at risk.

Having a broken regulatory system impedes our ability to take advantage of an historic opportunity. Our vast natural resource sector is driving our prosperity today.

Developed in a sustainable manner, this resource wealth and the associated infrastructure will also be the basis for Canada’s growth in years to come. A recent Conference Board study stated that for every $100 million invested in the electricity infrastructure up to 2030, real GDP will be boosted by $86 million and 1,200 jobs will be created.

Regulation has a critical role in business success. Effective regulation can support competitiveness and ensure environmental stainability, ethical business markets, worker health and industrial safety. The most competitive economies in the world — Switzerland, Sweden and Finland — have powerful regulatory systems that are also highly competitive. Canadian business understands this reality.

Unfortunately, instead of supporting the competitiveness of

the Canadian business community, our regulatory system is one of our key impediments to overcome. In 2011, the World Economic Forum identified “inefficient government bureaucracy” as the most problematic factor in doing business in Canada. The time, expense and uncertainty large projects need to navigate the regulatory process erode the competitiveness of Canadian business.

The duplication and conflict that too often exist between federal and provincial authorities in natural resource project assessments mean that projects are reviewed and approved by one government, only to have to face a separate review by another. Even among federal agencies, there is little effective coordination. Parliament has established myriad independent processes under different statutes — Fisheries Act, Species at Risk, Navigable Waters Act, to name a few — that all must be carried out to ensure the legality of a license. This regulatory hodge-podge frustrates both project proponents and the officials

who have to administer it.

As we bureaucratize these key decisions, we also undermine Parliament’s role, blurring accountability for some of the most important economic and social decisions our country will take.

For example, more than 4,000 interveners have signed up to appear in the hearings on the proposed Northern Gateway Pipeline. A large proportion of the interveners will raise issues that are more political than technical.

They have every right to do so, but it is our elected officials, not technocrats, who should respond to them.

Today, developing a new mine in the Northwest Territories requires a minimum of 10 years, thanks to regulatory delays and uncertainty caused by the existence of no fewer than five review boards. Even projects with clear environmental benefits, like the wind project I mentioned earlier, are not immune.

The federal government is working on this problem. It has signed agreements with eight of Canada’s provinces and territo-

ries to coordinate a single environmental assessment process in some cases. It has also established an office to coordinate the various federal processes. It was a good idea, but officials there can’t simply ignore the law, and the law requires the current inefficient approach.

This is a key task for the federal government. We need new laws which preserve the integrity of environmental review while improving efficiency. As the government invests its majority in the key challenges facing Canada, this must be a high priority.

Canadians are blessed with our richness of natural resources.

Properly managed and brought to market in a way that respects environmental and social needs, they will create prosperity for families throughout Canada. But to be good stewards and to benefit from our resource inheritance, we need a regulatory system that is both effective and efficient. Today’s regulatory jungle falls far short of that goal.

Now is the time for tax simplification Anthony Ariganello Two simple words – tax time. Depending on who you talk to these two words conjure up a range of emotions. From having the fear of paying more money to the government, to wading through onerous amounts of paperwork to file a tax return – it can be a difficult time of year for many.

Even though many individual taxpayers and businesses rely on the guidance of their accountant to ensure their taxes are done correctly, the system still needs improvement. A way to address these issues is by simplifying the tax system.

Canada’s tax system has grown to almost unmanageable levels.

There has not been a technical tax bill introduced for over a decade and no formal review of the system for decades.

Canada’s tax system is one of the most complex in the world, and while countries like the United States, Australia and United Kingdom are actively taking steps to modernize their tax systems, Canada is falling behind.

Tax simplification has many benefits including, but not limited to, reduced administrative costs for government, less paperwork for businesses, and lower compliance costs for taxpayers.

Tax reform is a formidable task but one that must be undertaken now. Canada – with all its fiscal advantages – cannot afford to fall behind its global neighbours

and risk becoming a less attractive place to do business. To help build a strong, competitive economy, we believe the federal government should set a clear course to streamline and modernize Canada’s tax regime.

The Income Tax Act is costly for the government to administer.

Streamlining and modernizing the tax system to reduce inefficiencies and complexities will allow this money to be re-directed to social programs, deficit reduction or further broad-based tax relief.

According to the Canadian Federation of Independent Business, businesses in Canada pay over $12 billion a year to comply with tax requirements. This is over and above taxes paid in the course of running their businesses. For individual taxpayers, the cost of preparing and filing personal income tax returns costs between $4 billion to $5.8 billion annually, according to a recent study carried out by the Fraser Institute.

In its recent report, the House of Commons Standing Committee on Finance recommended that the federal government convene an expert panel to review, modernize and simplify the personal and corporate tax systems. CGACanada made this recommendation in its 2011 pre-budget submission and fully supports the creation of such a panel as the best way to move forward on the issue of tax simplification.

CGA-Canada also recommended the federal government bring

Canada’s tax system has grown to almost unmanageable levels.

There has not been a technical tax bill introduced for over a decade and no formal review of the system for decades. forward a technical tax bill to deal with the unlegislated tax proposals sitting on the books.

This is long overdue and we look forward to such a bill being proposed sooner rather than later.

Tax reform fits with the government’s current agenda. With the recently released report from the Red Tape Reduction Commission, the government has announced its intention to act swiftly on recommendations to reduce the red tape burden facing Canadian businesses. Now is the time to make changes to the tax system.

This is what Canadians want – a simpler, fairer and more efficient tax system.

A simpler system, free of red tape and complexity could lead to business expansion and increased employment, which would in turn stimulate Canada’s economy.

The time is right for Minister Flaherty to set the course for significant change to Canada’s tax system in Budget 2012.

Click here for the formerly live sketches from the NDP leadership race.

10 March 29, 2012 | iPolitics.ca

Don’t count on revolving door, Clement hints to public service Elizabeth Thompson The federal government appears poised to tackle the problem of employees who lose their jobs in the wake of upcoming budget cuts returning to work under contract.

Speaking to reporters after testifying before the government operations committee, Treasury Board President Tony Clement was asked how the government plans to avoid a repeat of the revolving door that was evident in the public service in the 1990s.

Jobs were cut, only to have many government workers return to work by trading a pay cheque for a consultant’s cheque.

“This is where if you do the right thing — first of all, I don’t want to speculate too much but obviously what we’re looking at in some cases are reduct—,” Clement said before catching himself, concerned he was tipping his hand.

“You almost got me there,” he laughed. “I’ll be able to answer that on March 30.”

Clement’s comment comes as public servants across Canada are bracing for the results of the federal government’s strategic and operating review, an exercise Clement has dubbed the deficit reduction action plan. A cabinet subcommittee led by Clement has spent the past year examining ways to cut anywhere from 5-10 per cent of the government’s

budget, or $4 to $8 billion.

The results of that exercise are to be unveiled when Finance Minister Jim Flaherty tables his budget March 29.

Public-service unions are preparing for the worst with some predicting tens of thousands of government job cuts. Clement said public servants “are not just figures on a page,” and he understands their concerns.

“We’re dealing with human beings who are quite anxious right now about their prospects, so I don’t take that very lightly at all,” Clement told reporters, adding the government will respect the terms of its collective agreements.

However, it could be some time before Canadians, and civil servants, know the details of exactly what programs or services — or jobs — are going to get the axe.

Liberal MP John McCallum demanded to know why the government doesn’t tell people on budget day what exactly is being cut.

“It’s six, seven months after budget day when people will know, if then.”

Clement defended the Conservative government’s plan to give only a very broad overview of planned cuts in the budget.

“I think our obligation is to provide accurate information, both to those individuals who are affected and to the Canadian citizens,” said Clement. “We will provide that accurate informa-

tion when we have it, it will be pursuant to a budget implementation act being passed, it will be pursuant to notices that we give to affected individuals, it will be pursuant to obligations of posting that information to Parliament that we take very seriously and we will abide by.”

Some details will be provided in the spring, others will only be finalized in the fall, Clement said.

Clement said he hopes to either find new jobs for people within the government or provide them

with a “humane exit strategy.

However, not all cuts can be accomplished through attrition, he told reporters.

“I never said we’ll do all of our reductions through attrition, but I had said consistent with our platform commitment, we’ll do as much as we can through attrition.”

Under questioning by NDP MP Mathieu Ravignat, Clement said $16 million being allocated to a litigation fund over the next two years is to pay for litigation al-

ready before the courts – not for future cases.

“The public service unions are taking us to court a lot so we had to have more provision for lawyers’ fees.”

Meanwhile, Clement praised the comm`ittee for tackling the question of Canada’s budget and estimates system, pointing out he just tabled main estimates in Parliament for next year that will have to be amended after the budget is tabled.

“It’s all out of whack right now.”

Parliament to cut own spending by nearly 7 per cent Elizabeth Thompson The House of Commons will cut its spending by an estimated 6.7 per cent or more as part of the federal government’s belt tightening exercise, iPolitics has learned.

NDP House Leader Joe Comartin said Parliament’s Board of Internal Economy has finished its examination of the House’s spending and the details will be announced when the federal budget is unveiled.

“There were some areas where there were significant cuts and others where there was none at all,” he said. “But on average it worked out to 6.75 or 6.85 per cent.”

Main estimates tabled recently

by Treasury Board President Tony Clement allocate a $445.8 mil-

lion budget to run the House of Commons in 2012-13. A 6.75 per cent cut would represent a $30 million drop.

However, Comartin said not all of the spending cuts will kick in right away.

“Not all of them are coming in this year. You won’t even see some of them. Some of them are further down the road.”

Unlike many government departments, the House of Commons voluntarily participated in the strategic and operating review, also known as the deficit reduction action plan, which is expected to cut between 5 and 10 per cent from overall government spending.

However, because its participation was voluntary, the House

of Commons didn’t have to go through the same cabinet approval process as other areas of government.

Among the areas where the House of Commons plans to trim costs is the way it administers the MPs air travel, said Comartin.

However, he said it won’t affect the ability of MPs to travel.

“That is one of the areas they have changed … there are quite significant savings. It’s one of those areas where when you see it you’ll say why weren’t we doing this before.”

“That’s one of the ones where not all the savings will come this year. There are contracts that will run out.”

Printing is another area where the House of Commons will tight-

en its belt.

“There were printing savings that were kind of interesting,” Comartin said.

Some things the House of Commons was planning to spend money on are also being curtailed, he said.

“A number of the savings are things that were budgeted for and we actually never spent the full amount so there are some significant savings there.”

During recent committee hearings, Speaker Andrew Scheer was asked why Parliament doesn’t combine security forces to save money and improve efficiency.

Currently, the House of Commons and the Senate each have their own separate and distinct security forces – each with juris-

diction over their portion of the Parliamentary precinct.

However, Comartin said combining security forces is not one of the measures the Board of Internal Economy adopted to cut spending.

“That wasn’t discussed. That will be coming further down the road. We have to hammer that out with the Senate.”

Nor are MPs pensions part of the House of Commons belt tightening since they fall under the Treasury Board, he said.

The results of the government’s belt tightening will be unveiled Thursday in Finance Minister Jim Flaherty’s budget. However, it could take months for the exact impact to be known and for it to translate into job cuts.

11 March 29, 2012 | iPolitics.ca

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:

12 March 29, 2012 | iPolitics.ca

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 be used to support tax changes done to confirm whether the that would strengthen economic basic structure or targeted growth and job creation. measures fairly reflect these The CGA report concludes that: changing realities.”

“It would be extremely valuable for the federal govThere have been few attempts ernment to review the literat tax simplification and for good ally hundreds of targeted tax reason. They come with signifimeasures in the personal tax cant political risks, because it system to determine their relmeans eliminating special prefevancy and need …” erences for groups, individuals, Equally important is the need industries, and sectors – preferences that can no longer be justi- to reform the Corporate Income fied. Issues of fairness will have to Tax (CIT) system, but probably on a more selective basis. The CIT be addressed in such a review.

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), corporate tax rates have been respecial interest groups.

The payoff of such a review, how- duced, and the capital cost allowever, would be substantial in both ance system has been improved.

Nevertheless, there are areas, financial and economic terms.

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

13 March 29, 2012 | iPolitics.ca

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.

14 March 29, 2012 | iPolitics.ca

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.

15 March 29, 2012 | iPolitics.ca

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

Development

Governance

Educaation

Health

2003: 57

2003: 28

2003: 8

2003: 29

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

Includes: transparency, accountability, plan

Includes: education, post-secondary, learning, school

2010: 50

Includes: health, health care

2004: 38 2004: 7 2004: 42

2004: 24

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

2005: 40

2006: 21

2008: 16 2009: 47

2007: 21

2010: 16 March 2011: 15

2009: 50 June 2011: 28

2010: 46

March 2011: 6 June 2011: 39

Includes: environment, environmental, sustainable

2003: 14

2004: 11

2005: 19

2006: 8

2006: 4 2007: 8

2007: 21

2008: 8 2008: 4 2009: 3 2010: 4

2008: 30

Environment

2005: 33

2007: 22 2007: 18

March 2011: 38 June 2011: 68

March 2011: 1

2008: 7

2009: 3

2009: 2

2010: 4

2010: 2

March 2011: 3

March 2011: 0

June 2011: 0

June 2011: 10 June 2011: 3

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