OK, I lied

I know I said I wouldn't say anything else about the budget, but given that one of the last things I wrote was:

"Where I feared that the distant plans actually would be implemented, most [everybody else] 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.",

I couldn't pass up mentioning Jeffrey Simpson's recent column (overpriced subscription only) in the Globe in which he says,

"Only a prime minister with a fierce will, or a sharply different ideology, could adjust, let alone shatter, the iron framework of spending set by the 2005 budget."

And while I think his conclusion that,

"Politics will be about debates at the margin of things, or about value-laden social issues that don't cost money, because the cupboard for years to come has already been stripped bare."

is a bit over the top, if the next few budgets keep adding on another 5 years worth of spending/tax cut increases each, he may not be too far off. Anyway, I was starting to doubt my own reaction after it turned out to be such a minority opinion so it's nice to see a similar opinion offerred up by someone who's been following this stuff way longer than I have.

Seeing is Understanding

Andrew, over at Bound by Gravity has taken the numbers from my second post on the budget and put them into chart format.

Like they always say, 12 pictures are worth 1791 words and the charts really help give a better sense of where and when the money went in the budget. Worth a look.

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'

The Budget - Part 2

My general take on the budget was in part 1. This post is basically a list of all the spending / tax cut initiatives in the budget along with my opinion on them (where I have one).

The format is: Initiative Title / Amount this year / Amount in 2005-2006 / Amount in 2006-2007 / Amount in 2008-2009 / Amount in 2009-2010 / 2 year total (this year + 05/06 + 06/07) / 5 year total (from this year out until 09/10). It's in (roughly) descending order of size based on the 2 year total and all figures are in billions of dollars and rounded off to the nearest $100 million. Let me know if you see any errors.

Note that the two biggest items, health care and the new equalization framework had already been included in the fall update last November, so they're not really new as of the budget).

(yeah, I know, I should put it in a table, but I'm lazy, what can you do? -
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Update: Andrew at Bound by Gravity has created some charts which do a great job of capturing the figures which follow.
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Health Care deal: $5.8 / $2.6 / $2.4 / $2.3 / $2.6 / $3.2 / 2 yrs: $10.8B / 5 yrs: $18.9

I guess if the provinces are too chicken to raise their own taxes to pay for their health system properly, they have no right to complain about federal intrusion on their jurisdiction.

Equalization Framework: $1.5 / $1.6 / $2.0 / $2.5 / $3.0 / $3.5 / 2 yrs: $5.1 / 5 yrs: $14

If there's one file that could turn into a huge mess in the next few years, it's probably this one. I don't mind equalization too much, I guess it's fair compensation for poorer regions getting saddled with a currency which is kept at a level too high for them to compete at, thanks to the efforts of economically stronger regions.

Child Care plan: $0.2 / $0.5 / $0.7 / $1.2 / $1.2 / $1.2 / 2 yrs: $1.4 / 5 yrs: $5

I would put increased spending on early child care and education at the top of my priority list. The discrepancy between what we spend on university vs. the first few years of people's lives (when they can learn so much more) is pretty hard to justify. Still, the question of how to go about spending money in a fair and effective manner is quite a tricky one. I don't envy Ken Dryden, but hopefully at least some of this money ends up translating into higher quality care (whether private, public of family given) for our young children.

Gas Tax Money for CitiesCommunities: $0 / $0.6 / $0.6 / $0.8 / $1.0 / $2.0 / 2 yrs: $1.2 / 5 yrs: $5

Note that the Federal government isn't actually giving the cities the right to collect tax on gas (or even collecting the tax on their behalf) - they are giving the cities an amount of money roughly equivalent to 5 cents worth of gas tax - well they are planning to in 2009-2010 anyway. Municipalities really need some added taxation power of their own and gas taxes would be a logical place to start.

Strengthening National Defense: $0 / $0.5 / $0.6 / $1.1 / $2.1 / $2.7 / 2 yrs: $1.1 / 5 yrs: $7

While I'm not a huge fan of spending a ton of money on the military, I think that more money was needed at this point so this seems reasonable. What puzzles me is this:

"[the budget] provides Canada's military with $7 billion in new budgetary funding over the next five years, which will support $12.8 billion in additional expenditures by the Forces in that period. ... In the budgetary funding estimates shown in the summary table at the end of this chapter, the actual cost of the capital is spread over its life, and the annual budgetary amounts include only a fraction of the full capital cost. However, DND will have to pay the full costs of the capital in cash in the years that it is acquired. The Government will make that cash available to DND as it is needed."

So there is $7 billion in the budget, but there's an extra $5.8 billion that the government will 'make available' to the DND. I need to study government some more, I thought the purpose of a budget was to identify cash that the government was going to make available.

Investing Everywhere Except Southern Ontario in Regions and Sectors: $0.1 / $0.4 / $0.4 / $0.4 / $0.4 / $0.4 / 2 yrs: $0.9 / 5 yrs: $1.7

Maybe it's the born and raised southern Ontarian in me but this extra $0.4 a year for a motley collection of government pork projects (with some worthwhile ones mixed in) is probably the most offensive part of the budget to me.

Among the various recipients of funds here are: "provision of an additional $50 million in funding to the Textiles Production Efficiency Component of the Canadian Apparel and Textile Industry Program" and "new funding of $73.5 million in the next five years. With this funding, WD [Western Economic Diversification Canada] will launch a new Partnerships for Community Action initiative to work with communities vulnerable to economic adjustment pressures and with Western cities, such as Vancouver, Regina and Winnipeg, on their specific economic issues, and support other Western Canadian priorities. As well, WD will be provided with $18.2 million over five years to increase its contribution to Community Futures Development Corporations throughout Western Canada."

Here's the deal, we already have one equalization program, we don't need two. If it was up to me, I'd take the next 3 years budget for all these regional programs, use them to capitalize a venture capital firm for each region, appoint a board of directors from that region, give a share to everyone from that region and launch publicly traded venture capital firms in every region of the country. These organizations would be controlled by their shareholders who would (initially) be the residents of those regions. If they wanted to use the funds to invest in their region, fine and if they wanted to invest in China, so be it.

Anyway, I'm not saying that these programs don't do (some) good work, just that the money could be put to use more efficiently outside of these bureaucratic government programs.

Tax Cuts: $0 / $0.2 / $0.6 / $1.1 / $4.3 / $6.6 / 2 yrs: $0.8 / 5 yrs: $12.8

Increases to the basic personal exemption are welcome and in my view one of the most sensible ways to reduce taxes. For one thing, just about everybody gets the same benefit and for another, it saves a large number of people from paying a small amount of taxes each, thus saving both their time and the government's time. It's just too bad the amount won't make a significant move until 2008-2009 (not that I can see anyone forming a government and rescinding this measure, so it's just a question of when, not if, we'll get this tax cut.)

Meanwhile, Canada keeps running to keep up with all the other countries who are racing to see who can cut corporate taxes to 0 first, although we are mainly just trying to stay ahead of the U.S. by reducing the [federal] corporate tax rate from 21% to 19% starting in 2008 with the surtax disappearing in 2008 as well. Hopefully that was the last federal surtax left, since in my view surtaxes are just an unnecessary complication of the tax system. Tax rates for corporations above a certain size are crying out for an international agreement to stop this ongoing round of countries competing against each other to lure globally mobile corporations to their door. But I'm not holding my breath.

Canadian Heritage: $0 / $0.4 / $0.3 / $0.3 / $0.3 / $0.3 / 2 yrs: $0.7 / 5 yrs: $1.6

The (almost) majority of this ($0.7 over five years) money goes to something called the 'the Tomorrow Starts Today art and culture package' while another $0.2 (over 5 years) goes to 'help Canadian diversity find its voice in communities across the country'. I appreciate that government has a role to play in supporting culture which is non-commercial in nature but sometimes I think the Liberals come up with names for this stuff which are basically designed to thumb their noses at Conservative types and say hey look over here, we're spending money on this and you can't stop us - nah nah na nah nah.

There's also an extra $0.35 (over 5 years) for Sport Canada which doubles its budget. The rational part of my brain figures it may be silly to double our budget for amateur athletics but the irrational part of my brain wants the country to kick butt at the 2010 Olympics in Vancouver and is happy to see this.

Sustainable Environment: $0.3 / $0.1 / $0.1 / $0.3 / $0.8 / $1.0 / 2 yrs: $0.5 / 5 yrs: $2.6

And you thought the military spending was backloaded! (Note: I excluded amounts included in previous budgets - $2.2 which is now being planned to be spent in the next few years).

This funding is very widely scattered. The biggest item is the 'Clean Fund' which gets small change for the next 2 years and then roughly $0.3/year starting in 2007-2008. From the description it sounds like a (hybrid) vehicle through which the government will pay people to reduce their emissions. e.g. I undertake an action to reduce my emissions by 5 tonnes and the clean fund gives me $20/tonne or $100 (pulling numbers out of the air here). While the idea is interesting, I would have preferred a less bureaucratic approach, along the lines of the Wind Power Production Initiative which gets just $0.2 total over five years added to it's budget.

What's interesting is that the government seems to be moving in the direction of using the tax system more actively to encourage emission reductions. Whether they'll ever get beyond their current tentative steps such as giving renewable energy projects the same beneficial tax treatment as fossil fuels get remains to be seen.

Seniors (GIS Increases): $0 / $0.1 / $0.4 / $0.7 / $0.7 / $0.7 / 2 yrs: $0.5 / 5 yrs: $2.6

Maybe I'm cold, but I hope we don't regret this in 15 years.

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Anyway, there's lots (and lots and lots) more but I think I've covered the biggest spending items - let me know if I missed anything.

If I'm not sick of the budget, I may do a part 3 on the annexes (scroll down) which the government publishes with the budget and which, to a policy geek like myself, make for pretty interesting reading.

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.

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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.

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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.

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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).