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The Progressive Economics Forum

Andrew’s Budget Notes

I’ll post a fuller analysis later, but here are my notes from the lock-up:

What We Got – An Overview of Conservative Priorities

The centrepiece of the Budget is a new tax exempt savings vehicle which begins small, but will ramp up over time to eventually remove a high and rising proportion of investment income from income tax. It will eventually cost billions in lost revenues, but only pennies will go to ordinary working families who manage to save very little outside of pensions and RRSPs.

The Budget did next to nothing to address the deepening manufacturing and forestry jobs crisis, invested very small amounts in new job-creating environmental infrastructure programs, and cuts existing government spending programs.

Paying Down Debt or Investing in Jobs and People?

Even the most impeccably economically orthodox sources – the International Monetery Fund and the Economist magazine -have been questioning the Liberal/Conservative obsession with paying down debt. The Economist recently wrote that “ The International Monetary Fund, long a fierce advocate of budget discipline… is urging other countries to draw up their own fiscal plans in case the global outlook darkens. .. many countries have unusual scope to use their governments’ coffers. If it comes to it, they should do so. Countries from China to Canada have the wherewithal to counter a sharp slowdown themselves. They should not rely on America to do it for them. ”

This Budget uses the huge 2007-08 surplus of $13 Billion mainly to pay down debt, by $10.3 Billion. This money could have been used to fund the major investments we called for and to help support a slowing economy. The Budget allocates just $2.7 Billion of this surplus to new spending and tax measures.

As mainly already announced tax cuts take full effect this fiscal year and next, the surplus will fall to just over $2 Billion in 2008-09, and just over $1 Billion in 2009-10. Flaherty is no longer promising to pay down debt by $3 Billion this year and next – which is the right call given the economic slowdown and possibility of recession.

Tax Free Savings Accounts (TFSAs)

This is the flagship item in the Budget. Starting in 2009, Canadians will be allowed to put up to $5,000 per year (the amount will be indexed to inflation) in a special account, and the income earned will be free of personal income tax. Unused contribution room can be carried forward, and any withdrawals made up for through later contributions. Thus in 20 years, people will be able to have contributed well over $100,000 to such an account.

For the average person with modest savings in a bank account or GIC, the tax saving on interest income will be minimal. However, for high earners in the top tax bracket able to save $5,000 year after year and to reinvest the resulting investment income, these tax savings will build to a significant level as time goes by. A high income senior (income of above about $60,000) now faces a claw back of Old Age Security Benefits, but will be able to avoid this as well as regular income tax by saving in these new accounts. About half of the expected benefit is expected to go to seniors, and this will be heavily tilted towards the very financially secure. Already charging high fees for RRSPs and mutual funds, the financial industry will be delighted to have a new product to sell.

Flaherty’s long-term legacy to Canadians will be not just the shrunken federal tax produced by corporate tax and GST cuts, but also a new financial vehicle which will eventually result in very significant tax savings for the affluent. Indeed the Budget states that this new measure will, over time, and in tandem with RRSPs, virtually eliminate taxation of investment income for 90% of Canadians. Officials estimate foregone federal revenues of $3 Billion per year within fifteen to twenty years.

No Real Action on the Manufacturing and Forestry Jobs Crisis

As expected, Flaherty extended the two year fast write-off for new investment in machinery and equipment and tweaked the scientific research and experimental development tax credit. The temporary two year fast write-off for manufacturing or processing machinery and equipment is, however, fully extended for only one year, and then for another two years but on a reduced basis. This drew justified criticism from the Canadian Manufacturers and Exporters. Small improvements are made to the scientific research and experimental development tax credit for smaller businesses.

A small Automotive Innovation Fund will spend just $50 Million per year over 5 years to support auto sector R and D. While it does represent a symbolic acceptance of the reality of the auto crisis and the case for a sectoral strategy, this amount falls hugely short of what the CAW, the auto industry, and the Ontario Government have said is needed to support major new investments to save jobs.

No major new measures are announced to assist the forest industry beyond the already announced $1 Billion Community Development Trust. $10 Million over two years will be spent to promote Canada’s forest sector internationally as an environmental model.

The Targeted Initiative for Older Workers which was due to expire will be extended to 2012 at a cost of $90 Million ($30 Million per year.). This provides training and labour adjustment support – not income support – to laid off older workers in high unemployment single industry communities. No improvements were made to EI benefits, or to worker training programs.

Infrastructure and Environment

The existing Gas Tax transfer to municipalities worth almost $2 Billion per year and which was to expire in 2013-14 will be made permanent. This falls far short of the 1 percentage point of the GST, worth $6 Billion per year, called for by cities. Up to $500 Million in total will go to support specific public transit projects in Toronto, Vancouver and Montreal.

The Budget announces some small environmental/climate change measures, including implementation of industrial emissions controls, $250 Million for demonstration of carbon capture and storage technology, and $300 Million for AECL to support for new nuclear power development. The rebate for fuel-efficient cars will expire at the end of this year.

A Separate Employment Insurance (EI) Account: The Disappearing EI Surplus

The government is separating the EI Fund from the Public Accounts starting in 2009, and any surpluses – but going forward only – will be held and invested to meet EI program costs. The Fund will be run by a new crown corporation, the Canada Employment Insurance Financing Board. The new Fund will start life with a $2 Billion reserve – hugely less than the $54 Billion surplus in the existing EI Fund – and this will be made available to the new Fund by the government only if premiums would otherwise have to be raised in the event of a downturn. There is no detail on who will sit on the Board of the new Fund, or assurance that the government would back stop it in the event of a serious and prolonged recession. Officials say that the Worker and Employer EI Commissioners will continue to exercise their functions other than rate-setting, and may be consulted on appointments to the new Board. This measure will be implemented through the Budget implementation Bill.

Spending Cuts

The Budget funds new initiatives from rather deep cuts to existing spending. These total $386 Million per year when fully implemented. Almost half of the impact falls on international development (CIDA) programs, though these funds will supposedly be re-allocated to other development assistance programs. In effect the promise to contribute to $450 Million over 3 years to the Global Fund to fight AIDS are being kept by cutting other programs. There are significant cuts to Statistics Canada, Parks Canada, Canadian Heritage and to the Food Inspection Agency which will need to be closely analyzed.. As a result of spending cuts, total federal government program spending will fall slightly compared to projections in the 2007 Budget despite the flurry of small announcements.

Federal Spending Power

The Budget recommits the government to legislation to limit the use of the federal spending power for new shared cost programs in areas of exclusive provincial jurisdiction.

Student Grants and Post Secondary Education

In what seems to be a modestly progressive move, the expiring Millennium Scholarship Program will be replaced by a new Canada Student Grant program, starting in 2009-10 and funded by more than $400 Million per year in 2012-13. Grants to a maximum of $250 per month will be income-tested so as to benefit low and middle income families. The details will be worked out with the provinces.

Modest amounts are allocated to PhD scholarships (including for foreign students) and university research.

Poverty and Inequality

Flaherty failed to improve most income support programs targeted to lower income Canadians, though low income seniors will now be able to earn $3,500 (up from $500) before losing the Guaranteed Income Supplement. There are several small announcements in terms of support for aboriginal Canadians and persons with disabilities.

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