Federal Budget 2005: Something for everyone?

February 24, 2005

In a budget seemingly designed by public relations professionals and electoral strategists rather than public policy analysts, the Liberals have crafted a document that they hope will play on the sympathies of the left and the right.

But does this budget really have something for everyone?  

The 2005 Federal Budget has a provision designed to appease virtually every interest group in a seemingly endless shopping list of initiatives. But the Alternative Federal Budget calls for disciplined and far-sighted increases in public spending.  The social reinvestment in this federal budget is a mile wide and an inch deep.

The federal government takes some tentative steps in a number of positive directions. A number of high priority issues--getting started on a program for early learning and child care and complying with our Kyoto obligations--are addressed, but more gradually than we would like.  Of great concern is the lack of a plan on how to spend this money coherently and with strong accountability. GIS enhancements for low-income seniors as well as spending on Aboriginal housing are moving slowly in the right direction, but these isolated measures do not even come close to a strategy that really addresses the shameful level of poverty in Canada.

Moreover, child care, health care wait times and Northern strategy are funded out of trust funds- with all of attendant concerns about accountability and transparency pointed out by the Auditor General.  

While some right-wing commentators are claiming this budget represents a loss of control over public finances, the government’s own figures demonstrate that program spending will level off at 11.9% of GDP—still much less than the norm over the past 25 years.

And the tax cuts?  By the time all budget measures are fully implemented in 2009, about 40% of the value of the new commitments will be in the form of tax cuts.  

The government slashed the corporate income tax rate from the current 22.1% down to 19% by 2009, making Canada’s corporate tax rates 4.5 percentage points lower than comparable rates in the United States. At yesterday’s budget lock-up, finance officials guessed that corporate taxes rates have probably not been so low since the 1940s.

Increasing the RRSP deduction provides no help whatsoever to regular Canadians, most of whom are not too worried about having so much extra cash that they surpass the current RRSP $18,000 contribution ceilings.  And how about eliminating the excise tax on jewellery, at a cost of about $100 million per year?  Which segment of Canadian society benefits most from that measure?

But what of the tax cuts claiming to help low and moderate income Canadians?  

The only tax measure depicted as helping people of modest means is an increase in the basic personal exemption, which doesn’t target the neediest: everyone who qualifies for this benefit gets the same tax cut, whether the taxpayer is rich or poor. This exemption would increases anyhow because of inflation.  Once inflation is stripped out, in 2006 this measure will provide a whopping $16 in tax relief – that is if you make enough to pay income tax.  When fully phased-in by 2009, it will provide $192 per year – still less than $4 per week.  Only an estimated 3% of the value of this tax measure will go to low income Canadians.

The government could have provided much more substantial targeted tax benefits to low- and middle- income earners.  For instance, increasing the GST credit would provide much greater benefits to these target groups more efficiently – as would increasing the Canada Child Tax Benefit. Or it could have made a big dent in the heavy lifting required to repair social programs and address Canada’s chronic infrastructure problems. But the money directed towards these ends is limited and badly focused.  And there is precious little action on such things as making the employment insurance system work for workers, or re-investing in housing and post-secondary education.

By providing piecemeal spending to appease the left and tax cuts to court the right, the Liberal budget ends up using a lot of resources for little coherent purpose. And once all of the government’s tax measures are implemented, Ottawa will have about $7 billion per year bite taken out of its pocketbook, significantly compromising the government’s ability to enact public policies that really address underlying social problems.  

Ellen Russell is Senior Research Economist with the Canadian Centre for Policy Alternatives.