We had hoped that Budget 2012, the first for a Conservative majority, would provide a bold policy agenda that would confront the longer-run economic and social challenges facing Canada: the consequences of an ageing population; declining employment prospects; growing income inequalities; inadequate savings and investment; poor productivity; and, growing provincial economic and income disparities.  We had hoped that Budget 2012 would be the beginning of a more transparent, accountable, and inclusive budget process.

Sadly, this was not the case, and will not likely be the case for future budgets. 

What Canadians got on March 29th was a budget that will be remembered most for getting rid of the penny and telling future seniors, particularly low-income seniors, that they will have to work longer before they can receive Old Age Security (OAS) and the Guarantee Income Supplement (GIS). It will definitely not be remembered as a “transformational” budget, which would have set a course for “Jobs, Growth and Long-Term Prosperity”.

Our hopes were not based on experience. Budget 2012 reflects how this government has operated for the past five years. It is a budget that reflects the government’s lack of confidence in itself. It is a budget that demonstrates the government’s inability, or unwillingness, to engage in public discussion and debate over ideas and policy. It is a budget that sets out to attack groups that the government believes will stand in its way. It is a budget that is divisive among Canadians, and not inclusive of Canadians.

This budget is remarkable for its lack of vision and boldness. There is no narrative that sets out the longer-run economic and social challenges; there is no discussion of how these challenges are interrelated; and, there is no commitment to put aside ideologies and consider what is best for the country.

Mr. Flaherty seems to measure the success of Budget 2012 by its size, claiming that budget, which was 498 pages in length, was the largest of all the government budgets since 2006. But size doesn’t matter. What matters are vision, boldness, and substance. Three things that were lacking in this budget.

About half of the 498-page budget simply trumpets measures introduced in previous Economic Action Plans.  Many of the proposed initiatives are prefaced by “we intend”, “we will introduce legislation,” “we will propose”, without providing details on what the government really intends to do. It makes one wonder if the government actually does have a plan at all or perhaps has a “hidden” agenda. If this is the best they could do in their first budget as a majority, what can we expect from future budgets-Very little.

Eliminating the deficit has been the cornerstone of the government’s fiscal policy for some time. With the ending of the stimulus spending, the deficit is forecast to decline steadily over the medium term, with a surplus expected towards the end of the period (2015-16 or 2016-17).

Even before Budget 2012, the debt burden of the government was forecast to decline steadily, and program spending as a share of the economy was also forecast to decline steadily. Canada continued to have the best fiscal record of the G-7.

Even better, with the unilateral announcement by Mr. Flaherty in December of last year to cut the growth of the Canadian Health Transfer (CHT) from 6 percent annually to the growth of the economy beginning in 2017, the structural deficit problem of the government disappeared.

In other words, according to the government’s own numbers, there was no fiscal crisis facing the government in the medium term. Moreover, the size of the federal government is substantially smaller than in the 1970s, and the 1980s and roughly the same as in the 1990s and prior to 2009.

In other words, there was no need to cut spending in Budget 2012 to get rid of the deficit. The reason for cutting spending in Budget 2012 was simply an ideological desire for smaller government and the need to placate Conservative supporters. The only issue was how to do it, while at the same time confusing everyone about what the government was actually doing.

The commitment in Budget 2011 to undertake a Strategic Operating Review to find $4 billion in annual savings followed the Budget 2010 initiatives which restrained growth in national defence spending, capped funding of the International Assistance Envelope, forced departments to absorb the increase in annual federal employees’ wages for 2011-12, and froze their operating budgets for 2011-12 and 2012-13 at their 2010-11 levels. These actions were over and above selected Strategic Reviews implemented prior to 2010.

With the exception of the cuts to defence and the International Assistance Envelope, Budget 2011 “expenditure savings” were classified as initiatives to improve efficiencies.  The same also applies to Budget 2012 “expenditure savings”, which are to be achieved through “streamlining, consolidating, standardizing, and automating administrative functions”.

Budget 2012 makes little mention of cutting programs and services and few examples are given.  This means that the current “expenditure savings” exercise builds on the other exercises to find “efficiency” savings.  But how often can the government go to the “efficiency well” before the government discovers it has run dry?

It is simply unrealistic to believe that $5.2 billion in annual savings can be found without cutting programs and services. The fact is, that after almost nine months of reviewing spending, the government knows exactly what programs and services will be affected. It simply doesn’t want to tell Canadians.

Of the total $5.2 billion in ongoing cuts, $1.5 billion, or nearly 30 per cent, comes from defence and the International Assistance Envelope.  These cuts are over-and-above those announced in Budget 2010.  This says a lot about the credibility of the current exercise in finding the announced efficiency savings.  The easiest cuts to make are in these two areas and have nothing to do with efficiencies.  These are the first cuts previous governments have undertaken in their spending reduction exercises.

For the other reductions, few details are provided as to how the savings are going to be achieved.  Although a separate chapter is devoted to the impact by department, the language is vague and confusing.  In fact, many of the descriptions are not related to the planned reductions at all, but rather to how much more money the Government has provided in past budgets.  It is unlikely if we will ever know if these “new efficiencies” will be implemented and the savings found.

Not surprisingly, the budget introduced a proposal to increase the age of entitlement for OAS/GIS to 67 from 65 in order to ensure the sustainability of the program for future seniors. Yet nowhere in the budget is evidence provided to support the claim that OAS/GAS benefits are not sustainable.

In Budget 2007, Minister Flaherty committed to publishing a “comprehensive fiscal sustainability and intergenerational report with the 2007 Economic and Fiscal Update. This promised report has yet to be released.  With the focus of Budget 2012 on long-term prosperity, it should have be been released with Budget. 

The PBO released long-term federal sustainability report showing that the OAS/GIS program is sustainable without any change in the age of entitlement. The Minister of Finance criticized PBO’s work as being “irrelevant, unbelievable and incredible”. (Similar to the government’s criticism of PBO’s F-35 fighter cost estimates).

The Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) have strongly encouraged countries to regularly publish fiscal sustainability reports.  In fact, most advanced countries publish such reports.  Canada is an outlier.

It would have been extremely useful if the government released a fiscal sustainability report showing the long-term impact of the aging of the population, not only on federal expenses, but also on long-term economic prospects.  With such a report, Canadians would more clearly understand the challenges that lie ahead and be engaged in discussing potential policy options.  Presently, they are given only partial, and misleading information.   The lack of the promised “sustainability” report seriously undermines the transparency, accountability, and credibility of Budget 2012.  

The government makes the argument that there is a need to increase the age of entitlement for OAS, because people are living longer and there will be fewer workers to support a growing number of seniors. Of course there is no discussion of the fact that many seniors are already voluntarily working longer because they want to. Nor is there any discussion at all that the government should look at how to strengthen labour force participation among younger Canadians. The government’s election commitment to allow families with children under age 18 to split income would actually encourage a reduction in labour force participation.

Prior to the budget, Mr. Flaherty said the budget focus would be on jobs and growth. In his pre-budget consultations he asked Canadians for suggestions on how the Government could “better promote job creation and economic growth” and “what should Canada’s priorities be for the short- and long-term to encourage private sector growth and leadership in the economy”.

These are good questions. But it is depressing to believe that the budget represents the best answers the government could come up with.

The budget provides no narrative on the economic and social forces that will shape Canada’ long-term economic prospects; how they are inter-related; and, what the government could do to  “encourage private sector leadership and growth” and strengthen Canada’ long-term economic prospects. It is as if the government doesn’t really understand what the key long-term issues are, or if they do, they don’t want to discuss them with Canadians or actually lack the confidence to discuss them with Canadians.

The budget does not even provide a projection of Canada’s long-term potential economic growth and the key determinants underlying it- productivity growth and labour force growth. Most economists expect potential economic growth to decline from about 3 per cent annually to about 2 per cent over the next ten years, as a result of continued poor productivity growth and a slowing labour force growth as the population ages. What the budget should have done was set out a policy agenda to deal with both issues beginning in Budget 2012 and in subsequent budgets.But there was no policy agenda provided.

With regard to the challenge of improving Canada’s long-term productivity growth, the government’s response was to reduce the tax benefit of the Scientific Research and Experimental Tax credit and to reallocate the savings of only about $1 billion over five years to a number of small government programs, for which no details were provided.

With regard to strengthening labour force growth, the government’s only response was a proposal to deal with skill shortages through amendments to the Immigration Act and the arbitrary elimination of the existing immigration backlog. Again few details were provided as how this would work.

There was no discussion of how an ageing population will affect labour force growth, or productivity growth. This was left up to a Deputy Governor of the Bank of Canada to spell out in a speech delivered shortly after the budget.

There was no discussion of the need for increased savings and investment to increase productivity growth or how an ageing population will affect savings in the economy.

There was no discussion of the need to lower income taxes to increase savings and labour force attachment, and how this could be achieved through tax simplification and an increase in the GST. This is not surprising since this is the government that lowered the GST by two points and complicated the tax system with a proliferation of special tax preferences.

The government dug its head into the sand with respect to the employment insurance (EI) premium rate-setting system. In our letter to the Minister we proposed getting rid of the employer/employee EI premium since it is a job killing tax. We never expected the government would be that bold but we did hope that it would get rid of the Canada Employment Insurance Financing Board (CEIFB) since it does absolutely nothing. This didn’t happen.

Under the government’s proposal for setting the EI premium rate, the CEIFB is still required to recommend a rate to the Government.  However, based on the rates included in the fiscal forecast, the 5-cent annual cap is in effect to 2015.  This implies that CEIFB will not need to meet until 2016. At that time, the CEIFB will recommend an EI premium rate and that will be overridden by the Government.

The budget re-iterated the government’s desire to find new bilateral free trade agreements especially in the Asia/Pacific region and then turned around and took a large chunk out of DFAIT’s budget.

Finally, the budget proposed changes in the environmental review process for large energy and mining projects would eliminate duplication among jurisdictions and shorten the regulatory timeframe to two years. This seems like a sensible idea but there again there are few if any details as how the processes will actually be simplified, nor does the government seem at all interested in a public discussion on how it should be done.

If this wasn’t enough to get environmentalist in an uproar the government then proposed changes to the income tax act that would require that that charities disclose foreign sources of funds and demonstrate that the organization satisfied the 10 per cent rule for political activities. This was clearly aimed at environmental groups.

The 2012 Budget is disappointing not just for its failure to propose a credible agenda for strengthening long-run economic prospects, but also for what it says about how this government will continue to manage economic policy in future budgets. Budget 2012 will be remembered for its lack of vision; its lack of transparency;  its lack of accountability; and its lack of sound economic policy. Future budgets are likely to provide more of the same.


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