Articles

The most remarkable thing about the 2015 federal budget is how little new is in it. Everything meaningful had been preannounced. Gone are the days of activist government at the federal level. The budget’s message of tax cuts and balanced budgets will form the core of the Conservative Party’s election campaign as it seeks a fourth term in power.

Budget 2015 continues to shrink the role of government in the Canadian economy, emphasizing the continued cut in taxes since the Conservatives took power in 2006. The Harper government is enshrining into law this government shrinkage with balanced budget legislation, requiring no more deficits unless the economy moves into recession or in the case of extraordinary circumstances such as war or natural disaster. (I assume that a major terrorist event would qualify as a (un)natural disaster).

This stands counter-cyclical fiscal policy on its ear, requiring reactive, rather than proactive, governmental policy. Many economists are worrying about ‘secular stagnation’ in the industrial world and the resulting decline in real interest rates (nominal interest rates less the rate of inflation) to infinitesimal levels. Potential growth rates in Canada (as elsewhere) have fallen to below 2 percent as the population ages, productivity growth remains slow, business investment lags and households are forced to increase savings to smooth lifetime consumption. Hamstringing government policy in this environment seems untimely, at best. Of course, balanced budget legislation is simply window-dressing for an election, given that future governments could simply repeal the law.

Moreover, existing balanced budget legislation at the provincial level has done little to reduce provincial deficits. Indeed, fiscal austerity at the federal level has in part been accomplished on the backs of the provinces.

To be sure, the 518-page budget document rains goodies to all traditional stakeholders—from Aboriginals to municipalities. But the rain is no more than a sprinkle, with most of the benefits beginning in 2017, even for military spending, which is woefully inadequate for a world threatened by ISIS and Russian aggression in the Arctic. The Parliamentary Budget Officer has warned that government defence cuts have borne too large a share of the burden of deficit reduction since 2006 and that the current defence budget is “unsustainable at current force levels.”

Canadian Budget 2015

Infrastructure spending, small businesses, job training and growth also get relatively short shrift. The budget reduces Employment Insurance premiums for small business, but not until 2017. The small business tax rate is reduced from 11 percent this year to 10.5 percent next year and ultimately to 9 percent in five years.

The major benefactors are families and seniors, which is worthy and includes most of us. Promoted as the “Family Tax Cut,” the government announced six months ago that it is allowing parents with children under 18 to split their income for tax purposes for a maximum tax break of up to $2,000.

The government is also expanding the Universal Child Care Benefit to deliver an extra $60 a month per child to parents with kids under 6 and creating a new monthly payment of $60 for each child between 6 and 17 retroactive to January of this year.

This package of announcements will cost more than $5-billion per year, using up most of the $6.4-billion surplus for 2015-16 that Ottawa had projected in its 2014 budget.

Boomers will benefit from the doubling of the maximum contribution to Tax Free Savings Accounts (TFSAs) to $10,000 (not $11,000, as some expected). This is a very good idea given that most boomers haven’t saved enough for retirement and younger people would benefit from the huge compounding effects of tax-free returns.

Seniors benefit from the reduced mandatory withdrawals from Registered Retirement Income Funds (RRIFs). The reductions, however, are small and the mandatory withdrawal date remains at age 71—bad news for those who lost a bundle during the financial crisis.

The budget forecasts a surplus of $1.4 billion this fiscal year, the first surplus in seven years. At the height of the global economic and financial crisis, the deficit was as high as $55.6 billion.

The total government net debt burden is the lowest in the G-7 and among the lowest in the G-20. With the debt-to-GDP ratio at only 30 percent and headed for a projected 25 percent in five years, Canada’s federal government bond market is becoming increasingly illiquid and risk-free interest rates will continue to be extremely low. This makes it all the harder for Canadians to save for their children’s education and for retirement. The measures introduced to enhance personal savings through the TFSAs and RRIFs will help, but these low interest rates force savers to take more risk to enhance returns.

The plunge in interest rates, however, reduced dramatically the cost of funding the government debt, which has contributed meaningfully to deficit reduction.

Ottawa normally set aside $3-billion a year for unforeseen events, but this year the contingency fund will get $1 billion, which makes sense given the low level of debt.

Bottom Line: Ottawa gets high marks for maintaining its austerity credentials. The budget is a manifesto of PC Party accomplishments since 2006. Much of the budget reviews the actions of the past, rather than plans for the future. This is a play-it-safe budget—no big new ideas, but great success in deficit reduction, tax cuts and smaller government. The measure to help families, savers and seniors are worthwhile and affordable.

Reducing the flexibility of proactive counter-cyclical fiscal policy is misplaced in a world where central banks have very little room to counteract tight fiscal austerity. This is what happened to Japan in the 1990s and more recently, to some countries in Europe. Moreover, recent history shows that historically low real interest rates can result in excess debt and asset bubbles. The Bank of Canada cut record-low interest rates in January in response to the plunge in the price of oil knowing it was the only game in town as fiscal policy would tighten.