Big Business Endorses Big Spending!

Riddle: When is a Liberal budget, not really a Liberal budget?

Answer: When big business loves it!

There’s a fascinating sidebar to Jim Flaherty’s big-spending vote-buying budget last week, in the strongly favourable reaction which it received from the business community.  All the pundits’ complaints about the budget being “more Liberal than the Liberals” are actually welcomed by the Tories, since their goal with this budget is to cement their apparent realignment as decent, centrist folks who can be trusted with a majority.  But someone forgot to give the proper marching orders to the business lobbyists.  They are praising the budget’s finer points with wild glee.  This should raise suspicions that maybe these people aren’t really Liberals after all.

A good comparison can be made between Flaherty’s 2007 budget and the one that Ralph Goodale brought down in 2005.  For this comparison I am using the ORIGINAL Goodale budget — not the one that was later modified (by cancelling a corporate tax cut and adding some additional spending) in order to win (short-lived) support from the NDP.

Here are the main features of the two budgets:

2005: $14.6 billion in new program spending over the first 2 years, $6 billion in (officially budgeted) debt reduction, anticipated decline in the debt/GDP ratio of 3.6 points in 2 years, anticipated decline in the revenue/GDP ratio of 0.4 points in 2 years, a 2 point decline in the corporate tax rate by 2010, elimination of the corporate surtax in 2008, expanded child tax benefit, expanded RRSP limits, enhanced CCA deductions for companies.

2007: $28.4 billion in new program spending over the first 2 years, $6 billion in (officially budgeted) debt reduction, anticipated decline in the debt/GDP ratio of 3.1 points in 2 years, anticipated decline in the revenue/GDP ratio of 0.6 points in 2 years, a 2.5 point decline in the corporate rax rate by 2011, elimination of the corporate surtax in 2008, new child tax credit (not benefit), enhanced RRSP flexibility, enhanced CCA deductions for companies.

The greatest difference between the two budgets is the much larger amount of new spending announced by Flaherty.  (To be fair, the Liberals had already made several big one-time spending announcements in 2004.)  The business tax cuts are only marginally larger for Flaherty than under Goodale.  There is more debt reduction under Goodale than Flaherty.  (And in practice, debt ended up being paid off far quicker than the modest repayments officially announced in the 2005 budget — by a total of $22.4 billion over the 2005 and 2006 fiscal years.) 

However, business lobbyists weren’t swayed by this (superficial) resemblance between the two budgets.  They gave one-and-a-half thumbs down to Goodale’s “spending spree,” and two thumbs way way up to Flaherty’s “wise productivity budget.”  Here are the comparisons for some of the leading business voices:

Canadian Council of Chief Executives:  2005: “The biggest concern for business leaders is the overall rate of spending growth.”  2007: “The 2007 federal budget delivers a host of measures that will help Canadians compete more successfully in the global economy…. The government also deserves credit for taking action on so many fronts within a framework of sound fiscal management.”  There was no criticism of the 2007 budget’s big spending.

Canadian Manufacturers and Exporters:  2005: “It is clear from this budget that while the government is willing to spend heavily, … it just doesn’t get it when it comes to building a competitive business environment in Canada.”  2007: “The budget is good news for Canada’s manufacturers and exporters, as well as for the economy as a whole.  The budget shows the government is listening.  It will help our manufacturers and exporters … be more productive and competitive.”  There was no criticism of the 2007 budget’s big spending.

Canadian Chamber of Commerce:  2005: “The long list of spending initiatives … is counterproductive to Canada’s long-term economic well-being. We are disappointed that the government continues to deal with crucial areas like health care and the environment by simply throwing more of Canadians’ hard-earned money at them.  The chance to make fundamental investments in productivity for all Canadians has been missed.”  2007: “Budget 2007 contains a number of positive developments on the tax front…. However, so much more needs to be done.”  The Chamber did make relatively muted criticisms of the amount of new spending, but on the whole adopted a strongly positive tone.

C.D. Howe Institute:  2005: “If Ottawa continues to over-shoot the [spending] mark as badly in the years ahead, the federal budget will shortly move back into deficit and Canadians will have convincing evidence that federal parliamentarians have lost control of public finances.”  2007: The Institute felt no need to issue any direct response to Jim Flaherty’s budget, although President Bill Robson did pen an op-ed criticizing its no-strings-attached provincial transfer payments.

Big business typically covers its political bases by offering political, organizational, and financial support to both the largest parties.  (On Bay Street, this is called “portfolio diversification.”)  There’s no doubt, however, that business shifted its allegiances strongly to the Conservatives after the reunification with Reform made political victory much more likely.  This was reflected in the harsh business criticism of the Martin minority government, and the glowing support for Harper’s government.

And unlike many media commentators, business lobbyists understand very well that the numbers in Flaherty’s 2007 budget bear no more relationship to his government’s political plan, than the photos of Big Macs at McDonalds do to the item that eventually ends up on your plate.  This budget is but a way station on the way to much bigger and better things for business.  With their ringing endorsement of a budget that spends almost twice as much new money as Ralph Goodale did in 2005, the business lobbyists accidentally pull the curtain back from this whole phony play.

3 comments

  • Jim, your observation is an interesting one, but I am not certain that the business response was one of “glowing support” or “ringing endorsement”.

    The CCCE was, indeed, unusually positive. Presumably, the CME was positive because it got what it wanted, at least temporarily: a two-year writeoff for manufacturing and processing machinery and equipment. Nancy Hughes Anthony, President of the CCC, has been quite critical of the budget. William Robson, President of the C. D. Howe Institute, had an op-ed, “Flaherty’s Toxic Transfers,” in the Financial Post the day after the budget. His basic message was that, “Tax relief, not bigger transfers to provinces, is the true fix for the fiscal imbalance.”

    http://www.canada.com/nationalpost/financialpost/story.html?id=f309449e-2a25-4625-8539-0e41a32887a6&p=2

    Business has been less negative than the conservative pundits. However, it would be pretty difficult to be any more negative about the budget than these pundits have been. It strikes me that this mixed reaction could just be an example of business “covering its political bases.”

  • Erin, thanks for pointing out the CD Howe commentary — it wasn’t listed on their web site when I checked yesterday. So I guess their initial silence on the Flaherty budget should not be interepreted as blind approval!

  • If I had to wager on where the next Con budget would end up it would be squarely on an across the board reduction in taxes on capital which will only be constrained by their need to deliver on their promise to reduce PITs. So I think the thrust of Stanford’s analysis is correct. Although some caution should be exercised because even the Cons are going to come up against the budget constraint.

    As an aside, anyone have any comment on Ontario’s 50 million to Magna?

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