Crawl Across the Ocean

Sunday, February 27, 2005

Budget - Final Word(s)

OK, last post on the budget, I promise. I just wanted to wrap up a few loose ends.

First, I have so far failed to mention that the restriction on investing pension and RRSP funds in foreign countries (max: 30%) was totally lifted. Doesn't really affect me since I think my RRSP is 100% Canadian at the moment (am I going to invest in the U.S. with their currency situation? - and what do I know about conditions in Europe or Asia?) but I guess there are some business types out there who were chomping at the bit to get more of their money out of the country (diversify, in their minds).

It's probably more of a benefit for the larger pension plans who may have enough to invest that they are legitimately a little short on options sometimes in Canada, especially if they don't want to invest all the pensioners money in financial stocks and resources (not that that's been a bad plan over the last few years).

Politically, it seemed a little strange to me. I didn't think there was a whole lot of pressure to lift the limit (not entirely anyway) and it seems like encouraging (forcing) domestic investment of the money has been a good way to make sure adequate capital is available to Canadian companies (thus supporting the all-important productivity gains which the government is always chasing). Perhaps it's felt that our markets are 'mature' enough now that this support is no longer necessary, but I would have been more inclined to lift the limit to 50% first and see what happens. Seems like the kind of thing where it would be hard to go back.

Second, in reading other people's takes on the budget, I see that most (all?) are a lot more skeptical than I am about the later years of the budget plan ever actually being implemented. Where I feared that the distant plans actually would be implemented, most derided the government for even making such unlikely to be implemented plans. I guess we'll see how things go over the next few years.

Finally, if you're interested in what's on the mind of people in the finance department (and I'm sure that's what was on your mind before reading this post), the annexes to the budget make interesting reading. In particular, Annex 2: 'Canada's Financial Performance in an International Context' makes cheery reading for a fiscally conservative (should we change this phrase to 'fiscally un-conservative' someday to reflect the debt accumulating work of Harris, Reagan, Campbell and now Bush Jr.?) Canadian. The graph on program spending is instructive for those in a panic about the spending increases since 2000 (for those too lazy to go look, it basically shows that Canadian program spending as a % of GDP (for all levels of government combined) has dropped from one of the highest in the G7 as at 1992 to one of the lowest as at 2004).

Annex 3: Canada's Demographic Challenge has a fascinating series of stats and charts on the likely impacts of the demographic shifts coming in the next few decades. Among other things it shows that Canada is likely to face a bigger more sudden shift in it's demographics than most other countries (except Japan).

And Annex 4: A Framework for Evaluation of Environmental Tax Proposals is an interesting overview of the logic behind when and how it makes sense for the government to intervene in the economy in general and with regard to the environment specifically.

"In practice, perfect market conditions do not always hold. In some cases, the supplier does not bear all of the costs of production: other costs, called "negative externalities," are borne by other parts of society. Market prices then understate actual costs, and production and consumption levels are too high from the perspective of society. In other cases, producers or consumers may not capture all of the benefits of certain goods or services and "positive externalities" may accrue to other producers or consumers, or to future generations. Market prices are then above socially optimal levels, and production or consumption levels correspondingly are too low.

The presence of externalities, or other "market failures" such as lack of information in the hands of decision makers, generally underpins the case for government intervention. Under certain conditions, government may be able to correct for such market failures by implementing financial incentives or disincentives that establish improved price signals. Supply and demand may then respond in a manner that satisfies both private and broader public interests. If well designed, the intervention leverages the capacity of the marketplace to adjust, to innovate, and to minimize the cost of achieving defined public policy goals"

Overall, it's a good read and seems like a basis for sound policy development (in my book, anyway). It's just too bad that a lot of the policies the government actually implements (especially with respect to the environment) seem to have been designed by people who haven't read this document. Sigh.

Note: This annex kind of reminded me of this summary of the logic behind government intervention in the economy, only this time in the context of the U.S. considering the government's role in child care.

Well that's it for this topic. If you're lucky, next year I'll be jaded enough that I'll just post something like, 'Budget 2006 - Same old, same old'

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