ALTERNATIVE BUDGETS: DOES THE GOVERNMENT LISTEN?
On March 11th, the Canadian Centre for Policy Alternatives (CCPA) released their “Alternative Federal Budget 2013”. On March 18th, the C.D. Howe Institute released its “Prudence and Opportunity: A Shadow Federal Budget for 2013”. What impact will their policy recommendations have on Minister Flaherty’s 2013 Budget? None at all.
The two alternative budgets are as different as day and night, reflecting different economic views and political ideologies. The CCPA plays Santa Claus to everyone and everything with the exception of corporations and higher-income Canadians. The C.D. Howe, in contrast, plays scrooge, especially with federal employees.
The two alternative budgets were released just days before the tabling of the federal budget on March 21st. However, major policy decisions for the federal budget were made by the Prime Minister and the Minister of Finance in late December 2012/early January 2013. By the time the “alternative” budgets were released, officials at the Department of Finance were proofreading final galleys and getting reading for printing. Given the timing of their release, it is difficult to take these alternative budgets as serious contributions to public discussion on the budget. They were released simply to provide “advertising” for their respective institutions and their particular economic and political philosophies.
Given the timing for the release of these alternative budgets, we would have expected their economic and fiscal forecasts would have been updated to reflect current economic developments. Instead, CCPA uses the Parliamentary Budget Officer’s (PBO) October 2012 Economic and Fiscal Outlook Update, while the C.D. Howe uses Minister Flaherty’s November 2012 Update of Economic and Fiscal Projections. Since the release of these Updates, real economic growth in 2012 was lower-than-expected and most private sector economists have significantly lowered their growth forecasts for 2013. The budget projections underlying these “alternative” budgets are out-of-date, with the result that their policy prescriptions will not achieve a balanced budget by the dates specified.
The CCPA forecasts a balanced budget in 2015-16, which is of course the fiscal objective of the Government. This is surprising, given that the CCPA argues that the federal government does not have a “fiscal crisis” and that the Government should to implement stimulus measures to strengthen economic growth. In contrast, the C.D. Howe proposes further restraint measures to eliminate the deficit one year earlier – 2014-15. C.D. Howe argues that the deleterious effects of chronic federal government borrowing on confidence and on national savings make the delay in eliminating deficits unwelcome. They advocate advancing the date for eliminating the federal deficit in 2014-15.
The following Sections outline some of the initiatives proposed.
CCPA: Alternative Federal Budget 2013
By 2015-16, the CCPA proposes revenue increases of nearly $40 billion, primarily consisting of the elimination of tax loopholes, including taxing personal and corporate capital gains at the full rate rather than half; eliminating the mining and fossil fuel tax subsidies; introducing a 1% annual withholding tax on assets held in tax havens; eliminating the stock option deduction; increasing taxes on banks and financial institutions; raising the general corporate income tax rate from 15% to 21% by January 1, 2016; and increasing the corporate tax rate on oil, gas and minerals sector to 28%. They also propose to introduce a personal income tax rate of 35% on taxable incomes above $250,000; introduce a carbon tax of $30 a tonne on July 1, 2015 with about half of the money collected returned in the form of a green tax refund, which would be income tested; and implementing an inheritance tax on estates in excess of $5 million.
Their spending measures amount to about $45.5 billion by 2015-16. These include an infrastructure program amounting to $3.7 billion annually, replacing the Universal Child Tax Benefit with an expanded affordable child care; increased funding of about $3 billion annually to address First Nation issues; increased employment insurance benefits amounting to about $1.3 billion annually; annually funding for health care of about $10.8 billion per year; funds for affordable housing of $2 billion annually; maintaining international assistance at 0.31% of gross domestic income (incremental $300 million per year); additional $2 billion per year for post-secondary initiatives; $7.8 billion annually to address poverty and income inequality issues; $1.2 billion annually to bring those seniors below the poverty line up to the poverty line; $4.7 billion annually to improve the quality of water; along with some smaller initiatives. The costs of these initiatives is somewhat offset by reductions to defence spending ($5.6 billion by 2015-16) and the elimination of personal income splitting.
We will leave it to others to debate the merits of the individual CCPA proposals.
The CCPA proposes a very ambitious timetable to implement all of their proposals. However, experience tells us that there are always delays in the implementation of new spending initiatives. It is doubtful that many of the initiatives could be implemented in the timetable proposed.
They propose a “Rebuild Canada Program: Core Infrastructure” beginning in 2013-14. However, the $8.8 billion Canada Build Fund, which is to expire on March 2014, still has an unallocated balance of about $2 billion. No incremental funds for 2013-14 are required for any of infrastructure programs. It is also felt that funds already exist in the November 2012 Update to fund a program of about $2.5 billion on an ongoing basis.
Their proposed increases to employment insurance benefits would be offset by employment insurance premium rate increases to employees and employers.
To eliminate the deficit by 2015-16, the CCPA assumes that the net impact of these measures will result in higher economic growth and increased employment, resulting in increased revenues to the federal government of about $4.5 billion, on average, per year.
Typically, second round impacts (multiplier) are not included in the budget estimates, given the subjectivity of any number. As a result the CCPA budget is not fully funded by traditional measure.
C.D. Howe: Prudence and Opportunity: A Shadow Federal Budget for 2013
The C.D. Howe Institute proposes restraint measures totalling $4.7 billion in 2013-14 and $8.4 billion in 2014-15, resulting in increment interest savings of $0.2 billion in 2013-14 and $0.6 billion in 2014-15. As a result, the November 2012 Update deficit for 2013-14 of $16.5 billion would be reduced to $11.6 billion and a surplus of $0.4 billion would be recorded in 2014-15, rather than a deficit of $8.6 billion. However, as noted above, their economic and fiscal forecasts are based on the November 2012 Update projections. With slower economic growth now projected for 2013, additional restraint measures would have to be undertaken to achieve a balanced budget in 2014-15.
About half of their proposed savings come from restraining the growth in federal employee compensation. They propose to eliminate an addition 6,000 public service position over the next two years by replacing only about a third of retirements and departures. This would come on top of the 19,200 positions eliminated as part of the Budget 2012 expenditure restraint program. Without structural changes and/or elimination of programs, we do not believe that such reductions would be sustainable. The Institute does not identify any program reductions.
The Institute also proposes to limit employee compensation growth to 1 per cent annually for 2013 and 2014. In Budget 2010, departmental/agency operating budgets were required to fund the 1.5% increase in annual salaries within existing budgets for 2010-11. For 2011-12 and 2012-13, departmental/agency operating budgets were frozen at their 2010-11. All compensation costs are to be funded internally. Salaries for the Prime Minister, Ministers and Members of Parliament and Senators were frozen for 2010-11, 2011-12 and 2012-13. In the fall of 2010, the Government reached agreements with a number of bargaining agents, representing over 95,000 employees, which included the elimination of the accrual of severance benefits for resignation and retirement. For 2013, the average negotiated wage increase appears to be 2%. It is not known what rates of increases are “booked” in the expenditure framework post 2013. To achieve the Institute’s 1 per cent increase for 2013, contracts would have to be re-negotiated or over ruled through legislation. The savings are not possible for 2013-14
The Institute also proposes changes to federal employee pension plans and other post-retirement benefits. The changes will not realize any immediate savings – in fact would result in increased costs – so they are not explored further here.
The Institute also proposes a review of tax expenditures, resulting in savings of $1.5 billion in 2013-14 and $3.0 billion in 2014-15. This review would be conducted by a panel of academics and tax experts. We have long advocated for such a review as has the House of Commons Standing Committee of Finance. Savings of the proposed magnitude are possible, if not larger. However, the timetable may be ambitious, especially for 2013, as by the time the panel release its report, 2013 will likely be history.
Based on the above, the magnitude of their proposed savings is not realistic and unless additional actions are taken, the budget will not be balanced in 2014-15.
The Institute also proposes a number of initiatives to promote growth. These include reducing personal income tax rates and increasing the GST rate; undertaking a review of the Equalization program to reduce regional disparities and eliminating regionally-differential employment insurance rules; leveling the retirement savings playing field; adopting a formal corporate taxation regime; taxation of interest payments received from active business income of foreign affiliates; and examination of tariffs on imported manufactures and products. These proposals are worthy of further discussion and review. They are more long-term in nature. However, little action on any of them can reasonably be expected at this time in the political cycle.
These two budgets propose different roles for the federal government with the C.D Howe Institute favouring a smaller role and the CCPA favouring a larger role for the federal government. In both cases, however, the budgets would be balanced, although the CCPA uses dynamic scoring which is unacceptable. Elements of the Institute’s strategy could be incorporated into the CCPA strategy particularly tax simplification and a change in the tax mix.