Crawl Across the Ocean

Monday, March 19, 2007

Canadian Federal Budget 2007

The Budget.

Initial Reaction: "$52 million in funding for the Francophonie Summit? Those old Reform pigs really have turned into humans now. I wonder what Preston 'Snowball' Manning thinks of this budget..."

On Second Thought: "If I was a newspaper editor, I think my headline would read, "Flaherty: Chrétien was Right after all."

Let's recap:
Carefully targeted regional infrastructure spending? Check.
Token funding for the environment, but mostly re-announcing old spending and half-measures? Check.
Lowballed financial projections lead to larger than expected surplus? Check.
Next year's projections lowballed as well? Check.
A variety of carefully targetted tax deductions? Check.
Knowledge EconomyAdvantage Spending? Check.
Major area of federal-provincial jurisdiction 'fixed for a generation'? Check

OK, that last one was more Martin than Chétien, but poetic license and all that.

I honestly think that if you went back and read, say, the 1999 budget and then read this year's one, the only big difference you would see is that, while (core CPI) inflation has been relatively low over 1999-2007, inflation of idiotic rhetoric has apparently been running in double-digits over that period.

I guess Chrétien won 3 majority governments so perhaps there are worse people to emulate. There are specifically Conservative elements to this budget, of course. For example, only a Conservative government would have the nerve to declare an 'Entrepreuneurial Advantage' program in which 90% of the money allocated is handouts to farmers, but I digress.

Third Look:

I have to say, looking at the section of the budget that deals with equalization, the data analyst in me was impressed by how the new plan makes the numbers dance to try and reconcile the numerous conflicting agendas and ideals on the equalization front.

(Note: The O'Brien report on Equalization is good background reading for understanding many of the measures in this budget - as most of the concepts and dancing numbers (even the charts) are lifted directly from the report)

(Note 2: The Budget recaps the principles of the equalization program as follows:

Canada’s Equalization Program

* The Equalization program has existed since 1957, and the principle has been enshrined in the Constitution of Canada since 1982.

* Equalization payments are entirely funded by federal revenue sources. Provinces do not make payments to each other.

* Equalization payments are unconditional. This means that provinces are able to direct these funds to their own priorities.

* Equalization payments are made only to the less prosperous provinces. The lower a province’s fiscal capacity, the more per capita it receives.

* Equalization is not a permanent entitlement. As a province’s economic fortunes improve, its Equalization payments will decline. Conversely, as a province’s economic fortunes decline, its Equalization payments will increase.)

OK, enough notes, back to the budgets changes to equalization:

1) The formula for determining who is 'have' and who is 'have not' will be changed (back) to including all 10 provinces. In effect this means that any of the 10 provinces that have a fiscal capacity below the national average (all except Alberta, Ontario and B.C., currently) will receive equalization to bring their fiscal capacity up to that level.

2) Only half of a provinces natural resources revenue will count towards its fiscal capacity.

3)No province will be allowed to receive any equalization that would make its fiscal capacity higher than a province not receiving equalization. Right now, Ontario has the lowest fiscal capacity (per capita) of any province not receiving equalization so that means equalization for all provinces is capped when their fiscal capacity matches Ontario's.

4) The computation of fiscal capacity has been changed. Where there used to be 33 potential revenue sources considered, now there will only be 5. Property tax capacity will be based on market values of property.

Overall, I think the changes are wise. Including all 10 provinces just makes sense. I imagine that the only reason the federal government moved away from that in 1982 was to save costs during the recession. And counting 50% of resource revenue still seems like a government subsidy for fossil fuel use to me, hardly good policy in an era of global warming and peak oil worries. Having said that, much as I dislike them, I can hardly expect the Cons to commit political suicide by entirely abandoning their stupid promise to remove natural resource revenue entirely from the equalization formula.

One hazard will be the inclusion of market value of property taxes in the formula, a change which I suspect might be reversed or mitigated somehow in the future as real estate prices are far more volatile than genuine fiscal capacity. It's a mistake, but one that can be fixed at a later date, I suppose.

Politically, I doubt this will sell all that well in Atlantic Canada. According to the government's numbers, the changes to the program will result in roughly $1.1B of new equalization funding per year of which $0.7 goes to Quebec, and $0.4B goes to the prairies, leaving $0.0B (rounding) for the Maritimes (of course, there'd be more for the Maritimes ($0.2B) if Newfoundland and Nova Scotia opted in to the new formula, but they probably won't since it doesn't match the sweet deal they already have.) Given that the Cons are also changing the social transfers to the provinces so that they are rigidly fixed to the same per capita amount across the country, the Maritimes will likely come out behind overall on the changes.

Good Points, Bad Points, Random Points:

* Tax relief is generally targeted towards those who need it most.
* Changes to equalization won't keep the provinces quiet for long, but they are still generally well done.
* Books are still in surplus. Government hasn't blown it all on tax cuts for the wealthy yet.

* Government still isn't taking climate change seriously.
* Each year of Conservative government must add another volume to the tax act. Simpler, more broad based plans would be preferable
* It's a little thing, but waiving taxes for fat-cat IOC members when they come to Vancouver is irksome
* What's in it for me? Including property taxes in equalization will hit B.C. pretty hard, even if it is phased in over a few years, I'm not old, I don't have kids, I'm not a trucker, I'm not a farmer, I don't constantly run across the border to buy cheaper stuff in the U.S., boo-hoo.

* Increasing truckers meal expense deduction by 30% will cost the government $25 million in 2008-09? That's a lot of lunches.

Penultimate word: Times are relatively good these days in Canada on the economic front. Given the circumstances, it would be hard to bring in a really bad budget (although Mike Harris certainly managed it a few times). Harper, Flaherty and co. are working hard in this budget to convince people they are really Liberals and not just Cons in Liberal clothing - I guess we'll see how many people buy it. In the meantime, the budget should allow the country to roll along for another year.

Last word: At some point, true right wingers are going to realize that they need a party to the right of the Cons to anchor them to their (nutty, in my opinion, but hey it's a free country) right wing beliefs. A Liberal government opposed by Reform and Alliance leaned right for many years, and now a Conservative government opposed by Liberals, the NDP and the Bloc is leaning left.

I know Conservatives have their heart set on their precious (majority) and they're willing to swallow indignities like federal funding for the Francophonie if it means that they can take absolute power for a few years and then bring in some real Conservative policies and stop with this minority tiptoeing around, but I guess that if they don't get that majority in the next try or two their patience might run out.

So when the time comes for the Reform Jr. Party to sweep the prairies, split the right wing vote and keep the Conservatives out of power for another decade, I hope progressives will be ready and willing to do their bit to help.

* Post updated to note that the one glaring exception to 'taxes being targeted to those who need it' was the tax break for couples with children - all couples even if they are millionaires already. After the last two budgets, one does get the sense that Harper and Co. are much more focused on trying to increase the birth rate than they are on relieving child poverty or ensuring that all children receive adequate care as they grow up.

There is a widespread desire for 'more' in our society, and that includes a desire for a country with more power, more influence, and to make all that happen, more people. Of course the last thing our planet needs is more people but, as the budget shows, the Conservatives aren't overly concerned about the planet.


  • Nice analysis, except for this bit:

    In effect this means that all 10 provinces will receive equalization to bring their fiscal capacity up to the national average.

    That's not so. Ontario, Alberta and BC still don't get any equalization.

    By Anonymous Anonymous, at 6:22 AM  

  • Hello

    "the last thing" "the planet" (presumabky mostly the biosphere neeeds is more people. I can think of general nuclear war and several other things that would leave less people but also affect the rest of the biosphere much more than current human activities.

    Best Wishes

    By Anonymous Anonymous, at 2:44 PM  

  • Good point RC, I will clarify that passage.

    Alan - OK, maybe not the last thing, but it's pretty far down the list.

    By Blogger Declan, at 10:27 PM  

  • It's posts like these that put me out of business! Great work, Declan.

    And thank you for linking to my new space.

    By Blogger Andrew W., at 6:53 AM  

  • I must contest your views on equalization as not completely understood.

    Excluding natural resource revenues is NOT subsidizing the industry, that logic is ridiculous.

    Natural resource revenues are EXTREMELY volatile, much more than real estate, yet you consider the latter a problem?

    Natural resource revenues are "one-off's", as opposed to hydro revenues which are ad infinitum, and not included. Why is that? I will tell you why ... pure politics.

    Quebec will no doubt enjoy their new provincial tax breaks courtesy of western oil money. I wish they would just leave, but they are not that stupid to give up the golden goose.

    By Anonymous Anonymous, at 1:41 PM  

  • Otto - thanks. Of course, if the right wing noise machine has taught us anything, it's that there is a certain power in having lots of people saying exactly the same thing, so there's no need to feel redundant :)

    Anon - If a province effectively pays a larger financial penalty for developing other aspects of its economy than it does for developing its natural resources, that would tend to bias the province towards favouring natural resource developments because the equalization rules make the return higher for the province, much like a subsidy would.

    Natural resource revenues are quite volatile, as you say. But volatility in natural resource prices translates directly into fiscal capacity for provinces which sell natural resources. On the other hand, provinces aren't in the business of selling their land to outsiders so the volatility in land prices doesn't translate into fiscal capacity in the same way.

    Note that this is one area where the government didn't follow the recommendations of the O'Brien report (see pages 97-100) which recommended a stratified approach which would reflect the fact that property tax percentage (mill) rates are lower where property values are higher. i.e. Just because all the crappy houses on some rundown Vancouver street are worth a million dollars, it doesn't cost any more to pick up the garbage or maintain the sidewalks. This stratified approach also serves to muffle the impact of the volatility of land prices.

    Volatility of resource prices is still an issue, as you say, which is why they moved to use a 3 year moving average for the calculation.

    Finally, hydro revenues already are included in the calculation. There is some argument that they are understated because provincial utilities with extensive hydro resources tend to charge consumers lower prices than other jurisdictions, but they are included just like other revenue sources. See question 125

    If I understand correctly, hydro resources are still counting as 100% while non-renewable resources only count 50% - maybe it is just politics.

    By Blogger Declan, at 11:00 PM  

  • Hello Declan

    Now see Jen Gerson "First my life, then kids" Toronto Star C(Health)5 Friday, March 23, 2007.

    Best Wishes,

    By Anonymous Anonymous, at 2:50 PM  

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