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Budget 2011—Deficit Slaying Remains the Top Priority

by Todd A. Crawford and Matthew Stewart

Introduction

After two years of record deficits that followed the landmark stimulus plan of 2009, the federal government has restated its plan to return to balanced books. However, this plan does not entail a decline in overall program spending. Despite the end of the economic stimulus package, which pushed program spending up by 18 per cent over the last two years, program spending will continue to rise. According to Budget 2011, the federal deficit is estimated at $40.5 billion in 2010–11, down from $55.6 billion last year. Over the next four years, the fiscal plan will see the deficit reduced by about $10 billion a year—such that by 2014–15, it is essentially eliminated.

In addition to phasing out most recession-fighting stimulus measures, the government plans to achieve its deficit-slaying goal by holding growth in program spending to just 1.6 per cent per year over the next five years. That is a far cry from the 6.2 per cent annual growth seen over the five years before the stimulus program kicked in. Budget 2011 reasserts the plan outlined in last year’s budget to keep federal departmental spending frozen at 2010–11 levels for the next three years, despite a 1.5 per cent annual increase in public service wages.

Better-than-expected revenue growth in 2010–11 and a more optimistic economic outlook provide the government with a small amount of wiggle room over the next five years—about $8 billion more room than what we saw in the November 2010 Economic Update. This amount is very much in line with the cost of the new budget measures, which adds up to $7.6 billion over six years. This very small pie is sliced thin and spread among a wide array of new measures.

New measures meant to prop up business competitiveness, innovation, education, and employment are spread across a multitude of programs and total just over $2 billion over the next two years. Households will get a slightly lesser $1.8 billion over the next two years, with new spending targeted at low-income seniors, households with dependents, and a $400-million continuation of the program to retrofit homes for more efficiency. The measures are targeted to a large number of specific groups; in total, the measures are too small to add significantly to economic growth.

The government’s fiscal outlook includes $1.5 billion set aside each year to account for economic risk. The economic outlook is fraught with significant risks that could disrupt the near-term growth path for Canada. Oil prices could remain elevated if there is no clear resolution to the events in Libya, which could derail the recovery in U.S. business and consumer confidence. The full effects of the devastating Japanese earthquake and tsunami are still unknown. Europe is exposed both to the spike in energy prices and to ongoing sovereign debt issues that could again agitate financial markets. And global inflation is on the rise, particularly in emerging markets that are now at the centre of global growth, causing central banks to begin raising rates in the midst of a recovery.

Given these risks, it is important that the government stick to its plan to balance the budget. This target must remain a priority, especially given the current uncertainty associated with the global economy. Moreover, because of the burden of health care, provinces will likely find it much more difficult to bring their finances in order, making it all the more important that the federal government alleviate pressures on Canadian borrowing requirements by returning to balance.

Economic Outlook

The Department of Finance relies on a consensus of private sector forecasts to provide the economic indicators required to produce its budgetary projections. The economic outlook contained in this budget is in line with the most recent Conference Board economic forecast.

The risks to this outlook, however, are numerous. The prospects for stronger economic growth in major economies have lessened of late, particularly in Japan (the world’s third-largest economy) due to the catastrophic earthquake and ensuing tsunami on March 11; and that will likely slow global GDP growth in the near term. Moreover, continued unrest and violent uprisings in Middle Eastern and North African countries have resulted in higher oil prices in particular and increased volatility in commodity markets in general. To account for this risk, the government has prudently adjusted downward the private sector forecast of nominal GDP by $10 billion in each year of the forecast.

Fiscal Outlook

After posting the largest deficit on record in fiscal year 2009–10, deficit elimination is now the government’s main priority. However, the return to balanced budgets does not entail cuts to overall program spending. In fiscal year 2011–12, program spending is now expected to increase by 0.2 per cent despite the winding down of the largest stimulus program on record. The economic stimulus package pushed program spending up by 18 per cent over the last two years; program spending will continue to rise, albeit at the modest pace of 1.6 per cent per year, over the next five years. (See chart).

Stimulus Program Ends . . . but Spending Remains High

The return to balanced books has been helped by improved economic conditions, which should allow the government to balance its books in 2014–15—a year ahead of previous estimates, as the Conference Board forecast last summer. The deficit in the fiscal year just ending now stands at an estimated $40.5 billion—$5 billion lower than was projected in the November 2010 Economic Update. A little more than half of this improvement was due to improved economic conditions.

In addition, the government has found $2.1 billion in savings over the next five years from its 2010 strategic review. It has also closed several tax loopholes, which it expects will save it a further $4.1 billion. However, instead of taking advantage of these savings to further improve its fiscal situation, the government has announced new spending measures. The new measures remain relatively small, totalling just under $8 billion over the next five years. The government plans to identify an additional $4 billion in annual savings by 2014–15. However, these have not been included in this budget’s fiscal projections.

Measures

The $7.5 billion in new measures over the next five years are spread across a wide array of new programs. The most important new budget measures are described here.

Support for families and communities emerges as a priority in this year’s budget, with targeted spending exceeding $1 billion in each of the next two years. The Guaranteed Income Supplement (GIS) will be enhanced, allowing for a benefit increase up to $600 per single senior ($840 per couple). This measure alone is anticipated to cost $530 million over the next two fiscal years, and could extend to more than 680,000 senior citizens across Canada. Those senior citizens who earn less than $2,000 per year ($4,000 per couple)—not including GIS or Old Age Security income—will earn the full amount. The benefit is then gradually phased out to an income level of $4,400 ($7,360 per couple).

There is also support in the budget for the unemployed. The budget extends three EI programs that allowed for an additional five weeks of EI coverage, allowed for EI claimants to work, and based claims on the highest 14 weeks of earnings over the preceding year. Extending these programs will cost $420 million.

Recognizing the unique role that small businesses play in innovation for the Canadian economy, the government has declared 2011 the “Year of the Entrepreneur,” and it has proposed several measures that will encourage small firms to hire, reduce barriers that entrepreneurs face, and improve their access to financing. For example, the temporary Hiring Credit for Small Business will provide a one-time credit up to $1,000 against the increase in EI premiums in 2011. As many as 525,000 employers across the country will be eligible for this credit, potentially lowering cumulative payroll taxes paid this year by $165 million. Moreover, recognizing that overly complex regulatory requirements weaken competitiveness and impose real costs on entrepreneurs, the government will continue to consult with stakeholders through its Red Tape Reduction Commission, which was set up to streamline regulatory processes.

An estimated $111 million will be spent over the next two years to strengthen Canada’s public infrastructure. This will further advance public–private partnerships, and set aside funding for bridge repairs, ensuring that Canada’s highways extend to the Arctic coast. This funding will also extend to repairing storm damages to small craft harbours across Canada, where approximately 90 per cent of all fish landings in Canada take place.

The government has also allocated $142 million over the next two years to increase innovation and productivity in the agricultural and forestry industries. The accelerated capital cost allowance for investment in machinery and equipment for the manufacturing sector will be extended for two years, and some types of clean energy generation will be eligible for this credit. In addition, nearly $100 million will be extended to industry to fund technology and innovation in the areas of clean energy and efficiency. All in all, total spending to support job creation over the next two years is anticipated to be $724 million.

The government will also provide support to communities through a smattering of small initiatives, including:

  • a volunteer firefighters tax credit;
  • student loan forgiveness for doctors and nurses who choose to relocate to rural communities;
  • funding for CBC/Radio-Canada to promote Canadian programming;
  • support for Canada’s cultural sector; and
  • investments in on-reserve infrastructure.

The government saves its largest investments for protection of Canada’s natural environment. In renewing the Clean Air Agenda, the government aims to achieve real reductions in GHG emissions, while generating jobs. Chief among these investments is $400 million (in 2011–12) for the ecoENERGY Retrofit program. This program aims to make homes more energy efficient, reducing demand for energy across the country and lowering energy costs for all Canadians. In addition, more than $300 million has been set aside to address regulatory issues surrounding climate change, air quality, and energy efficiency. Another $200 million will be directed to the Chemicals Management Plan, which assesses and manages the risks associated with new and existing chemical substances.

The Conference Board has long been a proponent of advancing Canada’s relative competitiveness by enhancing our ability to innovate. Therefore, new funding in excess of $250 million over the next two years to enhance Canada’s digital economy is particularly welcome. The government proposes a new pilot program—the Industrial Research Assistance Program—to support collaboration between colleges and small businesses with the goal of accelerating their adoption of information and communication technologies. In addition, the government will allocate funds for the creation of new research positions and to promote enrolment in disciplines related to the digital economy. Several changes to the current student-loan program are proposed that will lower the cost of post-secondary education for many lower-income households and for part-time students. In total, spending on innovation, education, and training will be in excess of $300 million in each of the next two fiscal years.

Todd A. Crawford
Economist
Matthew Stewart Matthew Stewart
Principal Economist

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