Crawl Across the Ocean

Thursday, February 24, 2005

The Budget: Part 1

I was going to title this post, "$13 Billion for the Military!!!!!!!" but I somehow resisted the urge. So, the budget. First off, the relevant documents (i.e. the budget) can be found here.

There's lots of documents there so I recommend this summary as a good starting place. For some context, I recommend reading last year's summary as well.

2005 vs. 2004

Comparing last year's budget to this year's, I see two main differences:

1) The 2005 budget has a similar number of expenditures, but the numbers are a lot bigger - i.e. it is a much heavier spending budget. The 2004 budget contained $3.6B (combined tax reductions/new spending) for 2003-2004, $2.2B for 2004-2005 and $2.5B for 2005-2006.

This year's budget contains $10.8B (again combined tax cuts and spending) for 2004-2005, $7.4B for 2005-2006 and $8.8B for 2006-2007 (note: this includes both spending / tax cuts announced yesterday and the results of the health summit and the equalization deals with Nova Scotia and Newfoundland).

2) The 2005 budget is a five year plan while the 2004 was only a two year plan.

While the 2005 budget has $7.4B for the upcoming year and $8.8B for the year after, it also has $11.1B for 2007-2008, $16.3B for 2008-2009 and $21.1B for 2009-2010.

General Impressions

If you read this blog regularly at all, you'll know that I would have preferred a larger commitment to debt repayment but under the circumstances, retention of the $3 billion contingency fund to be allocated to the debt (if it's not needed), combined with continued conservative revenue forecasts1 by the government is probably the best that could be hoped for on this front.

In terms of the spending and tax cuts, most of what was offerred generally made sense, but there were certainly lots of items on the spending side that I'm skeptical about (more on that in part 2). Also, while I like the idea of cutting taxes by raising the basic minimum amount rather than cutting the rates in the actual tax brackets, I would have preferred to see the timing profile of the tax cut to be the same as the spending profile. To be clearer, tax cuts only take effect starting in 4 years whereas spending starts now. Personally, I feel that the biggest expenditures needed in Canada right now (education, health and infrastructure) are all primarily non-Federal areas of responsibility so it makes sense for the Federal government to continue scaling back it's role in the economy to make room for more taxes to be collected at the provincial /municipal level.

My biggest concern however, is that it is a...

Sneaky Budget

Why sneaky? Because of the shift from a 2 year horizon, to a 5 year horizon. Given the media's propensity to report budget items using as few numbers as possible, this allows the government to present spending totals which appear 2.5 (5/2) times as big as would normally be reported for a budget.

Take a random $1B/year expenditure - under the old budget rules it would have been $2B - now all of a sudden it's $5B.

Or consider tax cuts. Using a two year horizon, this budget contains basically no tax cuts. Next year's budget? Same thing. Not until 2007 would the tax cuts show up (in the second year of that budget). So the shift from 2 years to 5 years magically allows the government to announce tax cuts where there aren't any (at least not under the old planning rules).

The reason I think this trickery is dangerous rather than just irritating is because what do you suppose will happen next year? Can next year's budget afford to increase spending / reduce taxes in 2009-2010 by another $21.1B. And if so, what about the 2007 budget and the 2008 budget?

To put it another way, this budget contains on average a $13B increase in spending / tax cuts for each of the next 5 years. If every budget were to do that, it would add up to an extra $65B for each year. And if, on top of that, we keep spending $10.9B more than we budgeted like we did this year, well you can see that this kind of thing isn't sustainable over the long haul.

For now, federal spending is fairly low compared to post WWII norms so it doesn't bother me too much to see funding restored to a number of areas such as the military but I worry that 5 year plans as opposed to 2 year plans will build in a tendency for government to over-commit its resources as we move forward.

In order for a series of 5 year commitments to add up to the same total as a series of 2 year commitments they have to be only 2/5 (40%) the size (per year). But as I mentioned earlier, the new funds per year is much higher in this budget than the last one, so it's a bit of a double whammy.

So overall, I would have preferred more debt repayment as well as more targeted (read: smaller/fewer) spending increases in certain areas. Also, the tax cuts, while well designed, should start sooner, and most importantly, the shift from a 2 year horizon to a five year horizon is both sneaky and, in the long term, likely to do more harm than good. Still, it could have been worse.

Part 2 will look at (and give opinions on the worthiness of) the various individual spending items.

1 The budget says that, "The federal revenue-to-GDP ratio is projected to decline from 15.3 per cent in 2003-04 to 14.5 per cent by 2009-10, reflecting one-time revenue gains last year as well as the impact of the tax reduction measures announced in this and previous budgets."

I'm not really sure what one-time revenue gains they're talking about - sure they sold their remaining shares of Petro-Canada but I can't see how that accounted for more than 0.1% of GDP worth of revenue. Also, by my understanding, any tax cuts to take effect for next year are fairly small.

I'm sure lots of people will (many already have) say that this is just more Liberal lowballing to leave room in future budgets for new announcements and that may be true, but, having worked in government on a few occasions I suspect that somewhere in the Finance department there is a financial model which forecasts these things and this model probably expects that when taxes are cut that gov't revenue as a % of GDP should decline and isn't adjusted when that fails to happen (as it did this year).

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