The real Chretien legacy budget

February 18, 2003

After all the hype, was yesterday's budget Jean Chretien's "legacy" budget? The answer is yes, though not in the way he may have intended, and the Prime Minister's real legacy is not one of which he should be proud.

The advance spin prepared us to expect a massive spending budget, one that would be consistent with the image that Chretien wants for his legacy--a budget that sets a long-term course for social reconstruction.

In reality, the plan the Liberals announced yesterday is fiscally conservative dressed up as socially conscious, and fails to make needed social reinvestments. In other words, it is an appropriately weak legacy for a Prime Minister who oversaw the shrinking of program spending levels, relative to the size of the overall economy, to levels not seen since the early post war years.

A little context is in order.

The Liberal government balanced the books in the late 1990s thanks to swift and savage cuts to social programs. Program cuts allowed the government to balance its books, but also left a trail of growing poverty, widening income disparities, and deteriorating public services.

After the budget came into balance in 1997-98, and in response to growing demand for social reinvestment, the Liberals promised to allocate fifty cents of each surplus dollar to rebuilding social programs, and the rest to a combination of tax cuts and debt repayment.

From the promised "balanced approach" the Liberal record has been profoundly unbalanced--10% of surpluses have gone to spending (14% if you include the child tax benefit) and a whopping 90% to debt reduction and tax cuts.

Chretien assured Canadians that his government would rebuild the social programs and supports that had been cut so deeply, most recently the throne speech.

The Prime Minister talked a good talk. But yesterday's budget could perhaps best be described as "Throne Speech Lite."

There is a blip in spending in the current fiscal year because the government actually spends some 2/3 of the current year's surplus. But program spending relative to GDP actually declines in the subsequent 2 years.

Over the next two years (and including previously unannounced initiatives that will be booked in the current budget year), the government announced plans for a total of $15.5 billion in net new program spending.

However, it will almost certainly spend at least that much on debt reduction, and an additional $2.3 billion in new tax breaks. Some of these (such as increases to the Canada Child Tax Benefit) are in fact admirablespending through the tax system. But $1.8 billion, or two-thirds, will go directly to businesses and the top five percent of income earners.

In other words, if we were in the first year of a balanced budget, the Liberals would still fall short of their 50:50 pledge.

That does not even take into consideration the fact that previous tax cuts were so deep that the revenue capacity of the government is a whopping $22 billion less than it would have been at 1997-98 tax levels. And this weakening of fiscal capacity is growing as elements of the $100billion tax cut continue to phase in.

The decision yesterday to raise the RRSP contribution limits from $13, 500 to $18,000 over four years is a singularly bad idea. It is nothing more than an outrageous windfall for the richest 5% of income earner who have already benefited disproportionately from past tax cuts.

The phasing out of the corporate capital tax is also problematic. Corporate income tax rates have already dropped dramatically--from 28% to 21% under Martin ( when Michael Wilson started cutting they were at 36%.) The capital tax has served as a minimum tax ensuring that companies pay at least some taxes. This will result in an increase in the number of companies paying no taxes.

When it comes to social reinvestment, this budget is less than meets the eye. Nowhere is this more true than in health spending.

The actual money transfer to health over the next three years announced today is less than Romanow and less than Kirby.

Aside form a vague expectation that the provinces will report annually, thids budget does nothing to ensure that the new money will buy change. And by not imposing conditions limiting for-profit delivery or financing, it runs the risk that public money will fall under corporate control.

Even under optimistic assumptions there is no way that the federal share of total provincial health expenditures will reach 25% over 5 years as Romanow recommended.

In a an odd way this is the real Chretien legacy budget--it appears good on the surface, yet fails to meet the expectations of the Canadian people. The fiscal successes of the Chretien years were accompanied by a huge social debt. That debt is the real Chretien legacy, and yesterday's budget ensures that he will leave with Canada's social challenges unmet.

Bruce Campbell is the executive director of the Canadian Centre for Policy Alternatives. Todd Scarth is the director of the Centre's Manitoba office and cooordinator of the Alternative Federal Budget.