PAYING (or not paying) FOR ELECTION PROMISSES
With Parliament recessed for the summer and an election call imminent, all three major political parties will now spend the coming months outlining their campaign promises. All of these promises - past and future - will cost taxpayers a great deal of money. The question is how will they pay for them?
All three leaders have “promised” that their policy platforms will be fully costed and not lead to future budget deficits. Apparently the one thing Harper, Trudeau and Mulcaire can agree on is that deficits, no matter how small, are bad. This view was expressed in Bill C-59, the recently passed Budget Omnibus Bill, which included legislation that would require future government’s to maintain balanced budgets. Neither the NDP nor Liberals have indicated that they would repeal this part of Bill C-59 if elected.
This leaves raising taxes or finding new funds through spending and revenue reallocations. Raising taxes is definitely not on the Conservative agenda or apparently the Liberal agenda.
Despite the unforeseen fall in oil prices in 2014, the Conservative government, with a lot of slight of hand (reduction in contingency reserve, selling GM shares at fire sale prices, optimistic economic and oil price assumptions), produced a budget that financed all of its pre-election promises, while still leaving a surplus of $1.4 billion in 2015-16 rising to $4.8 billion in 2019-20. These remaining surpluses will allow the Harper government to make some new promises in the coming months.
These surpluses are also available to both the Liberals and the NDP. Like it or not, Finance Minister Joe Oliver’s April budget has now become the fiscal “benchmark” against which their policy platforms will be judged in terms of their commitments to maintain a balanced budget.
They could of course produce their own fiscal frameworks, using their own economic and oil price assumptions. But given recent developments, this would likely show smaller surpluses or perhaps no surpluses at all. Taking into account recent private sector forecasts for economic growth for 2015, would, in fact, eliminate the $1.4 billion budget surplus, as well as the $1 billion Contingency Reserve.
So where does that leave the Liberals and the NDP in terms of funding their election platforms?
For the Liberals, there have been a number of major policy announcements. First, there has been the proposed creation of the income-tested Canada Child Benefit and the cut in the middle tax rate from 22% to 20.5%. According to estimates provided by the Liberal Party, these two initiatives would cost $7 billion annually (beginning in 2016).
These initiatives are to be paid for, in part, by eliminating income splitting for families with children under eighteen and creating a new tax rate for anyone earning over $200,000. The Liberals have also indicated that they would keep the maximum annual contribution to the TFSA at $5,000. These three initiatives would raise about $1.3 billion in 2015-16 rising to $5.5 billion in 2019-20.
Second, the Liberals have made a number of major policy proposals with respect to environmental policy, although little detail has been provided and most of the proposals have not been costed. Based on information provided, the cost of these proposals amounts to a little over $400 million annually. However, a number of the proposals are uncosted.
Third, the Liberals have proposed major changes to how Parliament would function, including resumption of door-to-door mail delivery, restoration of the long-form census, increased access to all government data, among others. No cost estimates have been provided for any of theses proposals.
Lastly, the Liberals have recently announced major policy proposals in support of Aboriginals, the most important being a commitment to eliminate significant” gaps” between Aboriginal and non-Aboriginal Canadians. The Liberals provided no costing, but stated they would remove the existing 2 % cap on annual spending increases. Paul Martin in his Kelowna Accord, amounting to $5 billion over five years, made a similar commitment to eliminate “gaps”. It would be difficult for Trudeau to commit less. Assuming this to be the case would result in a financial commitment of about $1 billion annually.
Combining all sources of revenue with the remaining surpluses from the April budget ($1.4 billion in 2015-16 rising to $4.8 billion in 2019-20) would result in total available funds to finance Liberal promises of $2.7 billion in 2015-16 rising to $10.3 billion in 2019-20.
Subtracting the cost of policy announcements to date would leave a surplus of around $1.0 billion in 2015-16, followed by three years of deficits and a surplus of arround $2 billion in the fifth year. Since our numbers do not include the costs of all existing Liberal proposals, it is clear he Liberals will need to find new funds through spending and revenue reallocations to finance both existing proposals and any new announcements in the coming months.
So far, the NDP proposals have also been short both on costing as well as how they will be financed. NDP commitments include a two point cut in the small business tax rate (already implemented by the Conservatives); extension of the accelerated capital cost allowance for two years (already implemented by the Conservatives (but with a different phase in); an innovation tax credit for machinery used in research and development; an additional one cent of gas tax for the provinces for infrastructure; a transit infrastructure fund; increased funding for social housing; a major child care initiative; and, increasing ODA funding to 0.7 per cent of Gross National Income (GNI).
The last two proposals are by far the most expensive. According to the NDP, it would take eight years to create a million childcare spaces at an annual cost of $5 billion when fully implemented. No cost estimate or timetable has been provided as to when the target of 0.7 percent of GNI for ODA funding would be reached.
This is not surprising given that the federal government currently spends about $4.5 billion annually (0.24 % Of GNI) on international assistance. Increasing this ratio to 0.7% of GNI implies a tripling of the current cost to about $13 billion and rising every year thereafter.
The net cost of the NDP proposals could amount to $800 million in 2015-16 rising to roughly $9.5 billion in 2019-20. These estimates assume child-care costs of $2.5 billion and incremental funding for ODA of $ 4.2 billion in 2019-20 (a gradual increase in funding over 10 years).
The NDP are proposing to increase the general corporate tax rate, but have not indicated by how much. A one-point increase in the general CIT would yield about $1.8 billion annually. We have assumed a two-year phased increase of two points in the CIT raising the rate from 15 per cent to 17 per cent. Like the Liberals, the NDP would repeal income spitting and maintain the existing maximum annual contribution to the TFSA. Based on these assumptions total available funds from these three initiatives would be about $1.2 billion in 2015-16 rising to $6.2 billion in 2019-20.
Adding this to the remaining budget surplus leaves total available funds of $2.6 billion in 2015-16, rising to $11 billion in 2019-20.
Subtracting NDP election promises from available funds would leave a surplus of $1.7 billion in 2015-16 and $1.5 billion in 2019-20. Unlike the Liberals, however, the profile of annual commitments and available funds would leave the NDP with substantial additional sources of funding in both 2016-17 and 2017-18.
Certainly changes can be made to the above spending and revenue estimates, but they would not change the fundamental conclusion. Given recent economic developments (which suggest there will be no surplus this year) and global uncertainties, together with a commitment by all three major political parties to balanced budgets and no tax increases (other than the NDP), it would be fiscally imprudent for any political party to make new major election “promises” in the coming months without indicating how they would be financed.
Perhaps the Parliamentary Budget Officer should be asked to cost the election promises of all three political parties based on an updated economic and fiscal outlook.