Federal Budget Commentary Overview

In the afterglow of the Vancouver Olympics, federal Finance Minister Jim Flaherty mounted a podium in the House of Commons on Thursday, March 4, to table his fifth Budget, the second of the current minority Conservative government and the second in succession to follow a period of prorogation of the House.

The Minister described the Budget as a "jobs and growth budget" that completes the government's Economic Action Plan announced last January and "will help solidify Canada's economic recovery and sustain our economic advantage now and for the future." Outside commentators, however, generally characterized it as a "stand-pat," "stay the course," "cautious" or even "timid" Budget that contains no major surprises or significant shifts in government economic or fiscal policy. Specifically, it does not propose to raise taxes or cut major transfers for health care, education or pensioners.

Leader of the Opposition Michael Ignatieff, while broadly criticizing the Budget, indicated that his party will not oppose its passage through the House. In a media release, the CICA expressed "cautious optimism" about the Budget and gave it a "B-plus" rating. "This really is a wait and see Budget," said CICA President and CEO Kevin Dancey, FCA. "We won't know if this is a successful Budget until the government demonstrates that it has the ability to rein in costs."

The Budget projects a federal budgetary deficit of $53.8 billion in fiscal 2009-10 and a further $49.2 billion in 2010-11, but sharp declines thereafter leading to a deficit of only $1.8 billion in 2014-15. This outlook reflects the government's confidence in longer-term economic recovery as well as the intention to move away from stimulus spending to fiscal restraint, the Minister said. He also forecast that Canada would return to balanced budget status before any other G7 country.

The CICA's Dancey, however, said: "We would have preferred to see the government use a sharper pencil to get to a balanced budget sooner. While on the right track, it is unfortunate that that the Budget does not indicate when the country will return to fiscal balance as there is not a lot of room for error in the economic forecast."

"It is much easier to spend than it is to cut costs," Dancey added. "The government cannot flinch. Execution will be key to reducing the deficit."

Among proposed and continued spending programs aimed at stimulating and maintaining economic recovery are $3.2 billion in personal income tax relief including upgrading the basic personal tax credit and raising child benefits; over $4 billion in unemployment benefits including some EI premium relief; and $7.7 billion to stimulate infrastructure and housing construction. The Budget also proposes investment of
$1.9 billion to "create the economy of tomorrow," including $600 million to strengthen research and development efforts in Canada.

The Minister pledged increased restraint on government spending, most notably by slowing the projected growth of spending on defense and foreign aid. There are, however, few proposed cuts to program spending. He also promised to freeze the total amount spent on government salaries, administration and overhead. This includes freezing the salaries of the Prime Minister, other ministers, members of parliament and senators, as well as the budgets of ministers' offices.

While the Budget does not propose major fiscal policy shifts, it contains a number of fairly significant tax-related measures. For example, the CICA welcomed the government's continued commitment to cut the corporate tax rate to 15 percent by 2012, which the Minister noted will be the lowest corporate tax rate in the G7. However, the CICA urged the government to further reduce the corporate tax rate to the small-business level, currently 11 percent, as improving finances permit. "Moving to a single rate would reduce the complexity of the tax system while lowering compliance costs," said Dancey.

Other noteworthy tax-related proposals include closing some perceived tax loopholes to promote fairness, and the elimination of remaining tariffs on imported machinery and equipment. These and other provisions are discussed below.

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