The federal budget that will be brought down later today by Finance Minister Jim Flaherty is unlikely to contain many surprises. Small-c conservatives, including some within the Conservative party, are baying for deep spending cuts. Meanwhile, opposition parties are howling about bringing the government down if there is too little new spending on universities, home care, daycare, unemployment, seniors and Quebec. Mr. Flaherty is likely to respond to these competing pressures by avoiding both dramatic new spending and drastic tax cuts, in the hope that all sides are satisfied just enough to avoid defeat of the government in the House of Commons.
That’s politics. But fortunately, we’re not politicians. And so we won’t let the reality of a minority Parliament interfere with our dreams for a truly ideal budget.
First and foremost, the budget should contain a plan for reducing federal spending in real terms over the next four or five years. Mr. Flaherty’s 2010 budget outlined how the federal government intended to restore balance to the federal books by 2015 by holding the line on spending increases to just over 1% a year while praying for a return to robust annual revenue increases. In fact, merely planning to hold the line on spending is never going to be enough. For one thing, the Conservatives have never proven themselves capable of pulling it off. Despite coming to power in 2006 on a message of fiscal restraint, the Tories raised federal program spending by an average of 6% in each of their first three budgets before the worldwide finance crisis of 2008. Since then, they have added $100-billion to the national debt, in large part thanks to stimulus spending of dubious worth.
According to the Canadian Taxpayers Federation, as of last Friday, Canada’s debt stood at nearly $563-billion. This means the debt repayments made over the 11 years before the recession began have been wiped out, and that the federal treasury is back to where it was before the Liberals’ then-finance minister Paul Martin brought down his austerity budget in 1995.
Since the Tories took power five years ago, program spending has expanded by nearly 40% and the federal civil service has grown by nearly 20%. We’re sorry, but we just don’t trust a government with a track record like the Tories’ to be able to regain budget balance simply by holding the line on new spending.
If the Harper government wants to prove itself serious about bringing the budget under control, the budget has to contain a plan for real spending cuts over the next four or five years. It also must pledge to use at least the natural attrition in the civil service that comes from retirements and resignations to shrink the federal public payroll.
To further demonstrate its bona fides, the government should use this budget to begin reforming Canada’s antiquated and inefficient equalization system. A 5% cut to equalization would yield only a $750-million saving in the coming fiscal year. Still, it would signal to provinces that have become overly dependent on federal cash to fund their social programs. As Peter Holle and Marco Navarro-Genie of Winnipeg’s Frontier Centre for Public Policy pointed out on these pages last Friday, “have-not” provinces have used equalization to grow their civil services, pay for popular social programs such as cheap university tuition and daycare fees and subsidize consumer electricity rates without having to manage their budgets efficiently.
Concurrent with cuts to equalization, the Tories could transfer more taxing power to the provinces. This would enable provinces to continue to pay for their current programs on their own; that is, provided they could convince their voters the programs were still worthwhile when they are no longer heavily subsidized by taxpayers in other provinces.
While there is probably no chance this year for across-the-board tax relief, the Tories should hold firm, on the corporate-tax-rate reductions commenced by the Liberals while they were still in power before 2006. Canada is very close to having among the most competitive corporate tax rates in the G8 — lower than the Americans under Barack Obama. Along with our stable politics, peaceful culture, solid banking system and talented, educated population, low corporate tax rates provide a huge magnet for international investment.
Polls show that while Canadians have little appetite for more spending, most favour more help for seniors. Direct spending on senior benefits, however, could bankrupt the country as Baby Boomers retire. So instead of more payments to retirees, Mr. Flaherty should consider raising the age at which seniors must begin making withdrawals from their retirement accounts and lower the amount that must be withdrawn each year or face tax penalties.
Political realities in Ottawa ensure this will not be a sexy budget. Still, there is no reason it cannot be a creative budget, one that put Ottawa back on the path to budget balance and a falling national debt.