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Volume Ten, Number Two   March 2005

Federal Budget Credibility

Does it pass the test?

Marc Lee

The 2005 federal budget was an important credibility test for Paul Martin’s government. While Martin has been actively involved in shaping the budget for more than a decade, this was his first as an elected Prime Minister. The promises of the last election campaign are still fresh in public memory, and Martin has said he is committed to restoring trust in government. Delivering on those election promises would be a good place to start.

With deals for health care and equalization already announced, the budget contains some first steps towards a child care program, a new deal for cities, and an action plan for Kyoto. But dollar amounts in the budget are disappointingly small in 2005/06, with funding creeping up over five years.

Instead of using large projected surpluses to make more meaningful investments, the Liberals chose to buy the support of the Conservatives with some lavish tax cuts. The biggest surprise was the tabling of corporate income tax cuts that will cost $2.5 billion when fully phased in.

There are other measures that will be greeted favourably in the Shaughnesseys and Forest Hills of Canada. The RRSP contribution limit will be gradually raised to $22,000, and foreign content limits — that keep investment capital in Canada in exchange for the tax shelter — have been eliminated completely. These measures primarily benefit people with very high incomes.

In addition, raising the basic personal exemption for income tax will cost $3.6 billion when fully phased in. Low-income people will see little benefit from this move, and overall would have been better off with targeted tax measures, like an increase in the Child Tax Benefit, or stronger support for social programs.

Strangely, there is little new money in the budget for 2005/06. Most of the proposed changes, whether new tax cuts and spending increases, come into effect near the end of a five-year planning framework.

For Martin, this strategy means hanging on to the Prime Minister’s chair by averting another election. Conservative leader Stephen Harper remarked to the media that he saw no reason to vote it down.

This is a case of political expediency trumping the priorities of Canadians. The federal government is sitting on all of the money it needs to deliver on its election promises. But by continuing the trend of low-balling revenues and adding generous cushions to budget targets, the budget process is tilted towards debt repayment. This game-playing undermines public debate and confidence.

This budget also marks a ten-year anniversary. In 1995, Paul Martin, then Finance Minister, delivered a landmark budget that reshaped social policy in Canada. Transfers to the provinces were lumped into one bulk transfer and cut back. A casualty of this exercise was the Canada Assistance Plan, a framework that ensured minimum standards for social services were met by the provinces in exchange for federal cash.

With the 1995 budget, the feds essentially offloaded their fiscal problems onto the provinces, which have the responsibility for health care, education and social services. In every province, social services, in particular, got the short end of the stick.

The federal budget turned to surplus in 1997/98 and has remained solidly in the black since. In recent years, the feds have been slowly restoring funding to the provinces, with a series of deals on health care, and a new equalization agreement last fall. The 2005 budget is another timid step in that direction.

This means that federal program spending relative to GDP will be just under 12% in 2005/06, up from 11% in 2000/01, but well below the 16% level when the Liberals were first elected in 1993. Beyond the numbers, the real cost of budget cutbacks has been growing social and infrastructure deficits.

Tax cuts were an option for Canadians in the 2004 election, but a strong majority rejected tax cuts in favour of renewed social investment. The government may pass the 2005 budget, but, sadly, they fail the credibility test.

Marc Lee is an economist in the BC office of the Canadian Centre for Policy Alternatives.

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