What to Expect in Flaherty’s Budget

Everybody seems to think that next week’s federal budget will be a pretty boring, stay the course, “prudent” document because there is almost no room for fiscal manouevre. I wonder.

True, there is next to no surplus left for 2008-09 due to the big Conservative tax cuts made last Fall. But Flaherty is still sitting on top of about a $10 Billion surplus for the fiscal year ending about one month from now. He has promised to devote it all to paying down the debt. But, with many various and legitimate demands for fiscal stimulus and job creating infrastructure investment coming from the opposition parties, cities etc, he may be tempted to do something a but more politically exciting.

Even the most impeccably economically orthodox – the IMF and the Economist magazine -are questioning the Liberal/Conservative obsession with paying down debt. The Economist is now calling – guardedly – for Canada among other countries to do more to deal with the developing slowdown of global growth. http://www.economist.com/opinion/displaystory.cfm?story_id=10689567

” The International Monetary Fund, long a fierce advocate of budget discipline, has applauded America’s actions and is urging other countries to draw up their own fiscal plans in case the global outlook darkens. In addition to America, countries that make up a quarter of global GDP, the fund reckons, have the scope to cut taxes or boost spending. To reduce the odds of calamity, they should start contingency planning now (see article). Few outside America, however, accept this logic or share the urgency. Britain and Canada have cut interest rates in recent months, but by much less than the Fed. Canada has cut taxes recently, but is loth to do more….

The IMF‘s call for contingency planning is surely right.  True, history suggests that monetary loosening and targeted help to deal with systemic risks in the markets have often worked better than fiscal stimulus. But 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. ”

Further, the idea of a boring stand-still Budget presupposes that Flaherty will not deeply cut current spending in some areas to free up funds for new initiatives. The CD Howe Institute, calling in their “shadow budget” for about $6 Billion in program spending cuts for 2008-09, expect him to lapse some ad hoc transfers to the provinces and the cities and to cut non defence programs. This is entirely plausible given the Conservative commitment to stay more closely within a narrowly-defined federal jurisdiction, and ongoing program review.

So Flaherty can and may very well be able to finance some fairly ambitious tax and spending measures while still presenting a balanced Budget moving forward.

What might he do in the Budget?

Everybody seems to think he will extend the two year fast write-off for new investment in machinery and equipment and tweak the scientific research and experimental development tax credit to help the struggling manufacturing sector. Targeted support for real investment is welcome – and much more effective than very costly across the board corporate tax cuts – though making scientific research tax credits refundable in the past led to major abuses and any new plan should be carefully analyzed.

Business has been pushing hard for some kind of tax credit to support employer investment in training. That would not be a bad idea IF there is a serious definition on elgible expenditures and IF labour is fully included in the development of training plans.

I’d be surprised if Flaherty does nothing to heed the call from the Ontario and Quebec governments (and the Bloc) for more aid to manufacturing and forestry workers and communities. There may be some kind of support program for displaced older workers (an expert advisory group has been working on this.)
More aid to the cities for environmental infrstructure – perhaps by making permanent and increasing the portion of the gas tax transferred to cities – is plausible as the government tries to put a “green” foot forward.

The right have been pushing hard for higher RRSP contribution limits (with the Howe calling for a new form of tax assisted retirement saving) and Flaherty is likely to support greater incentives to saving in principle. This would be a terribly regressive move since only the very affluent have maxed out their existing RRSP contribution limits and have surplus cash sitting in taxable investment vehicles. The better way to go would be to increase OAS/GIS benefits to address poverty among the elderly in the short term, and expand the CPP/QPP over the longer term to deal with shrinking private pension coverage and the high investment fees associated with RRSPs.

Flaherty may make a nod to the issue of poverty and growing inequality by increasing his meagre Working Income Tax Benefit, which now provides a maximum of just $1,000 to very low income working families. He might also increase OAS/GIS , as called for by all parties on the Finance Committee.

The Speech from the Throne promised EI reform, and the Finance and HUMA Committees have been calling for an independent EI Fund, separated from the public accounts. This may happen – but it will definitely not come with the $54 Billion surplus in the current EI Fund. An independent fund without a major inherited surplus would be a recipe for benefit cuts or sudden premium hikes if we go into recession, exactly what we don’t need. Governance issues will also be central. Labour must continue to play a full and equal role in governance if a separate EI Fund is created – but Flaherty may effectively give employers a much stronger role, inevitably leadign to a focus on premium reduction at the expense of both regular and maternity/parental benefits.
With the Millennium student awards program drawing to a close, look for some new form of federal support for post secondary education. While needs-based grants would be the way to go, Flaherty might listen to the call of the CD Howe Institute for scholarships to attract foreign students to come to, and stay, in Canada.

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