Masthead graphic based on a painting by Gudrun Thriemer.

Saturday, January 31, 2009

Canadian Budget 2009

Links to "Budget 2009: Economic Action Plan" and the Speech from the Throne are available in English here=>

If you don't want to read government prose, but have high tolerance for lots of numbers, Karen Hawthorne lists without comment major spending in tax relief, infrastructure, housing and building trades, EI and training, the environment, industry-specific spending, and sport. (National Post Jan 27 09)

In his excellent and brief "Likes and dislikes about the budget" Devin Johnston is not the only one to mention the attack on pay equity. I also happen to agree with his concern about the size of the deficit. The Conference Board of Canada does mention that

In an effort to stimulate the economy, the federal government has introduced a package of tax cuts and spending that will cost an expected $38.2 billion over fiscal years 2009–10 to 2011–12. Consequently, the federal government now expects to run a cumulative deficit of $76.5 billion over the next three fiscal years. (See table). This will drive up the federal debt to $542.4 billion, erase 10 years of debt payback, and push up interest payments required to service that debt by $9.7 billion per year within three years. Taking into account the new spending initiatives, direct program spending is expected to grow by a whopping 13.1 per cent in fiscal year 2009–10—the fastest rate of increase since comparable data was first published in fiscal year 1983–84. In fiscal year 2010–11, direct program spending is then expected to grow by a further 3.2 per cent before falling by 2.9 per cent the following year.

The Conference Board's analysis of Budget 2009 is generally more readable and just as uncritical as the National Post summary.

They provide this handy graphic:

Many of the measures in this year’s budget are in line with the Conference Board's thinking and suggestions.

While the federal government has gone "above and beyond" their expectations on infrastructure spending for the short- and mediium term, the Conference Board admits that "it may be extremely difficult to put this spending [on infrastructure] in place as quickly as planned."

It is just one of a number of admissions, concessions and caveats. For example, "In addition to the costs of the active stimulus package, a falloff in tax revenues will cause the federal deficit to balloon over the next two years," something David Goldman has also discussed for the international sphere. Furthermore, the increased debt will result in substantially higher interest payments and other debt-servicing costs.

It seems to me that the streamlining of approval processes in the "shovel ready" concept also risks further weakening of the regulatory process, but this is not something the Conference Board addresses.

The Conference Board does speak of a deteriorating economic outlook "over the last several months" which has already "led to a collapse in projected revenues, particularly in fiscal years 2009–10 and 2010–11." The authors also recognize that the feds infrastructural spending will force provincial governments further into the red.

Hoping that a positive attitude will help break the recessionary psychology, the Conference Board believes that "Strong domestic demand will also help the Canadian economy continue to weather the storm south of the border."

This demand is to be "resuscitated" with an active fiscal policy in the form of tax cuts and spending. Nevertheless, the CB acknowledges increased household savings and consumption of imports as "leakage" that can reduce or eliminate the desired effect entirely. This is the "vicious cycle of thrift."

In the CB's eyes, Flaherty's permanent tax cuts are designed to benefit low- and middle-income earners. The budget hopes to promote residential investment through a home renovation tax credit, believed to stimulate the forestry, construction and resale sectors. That's a heavy load for a reno industry getting by on grants of up to $5000 to make a home more energy efficient. Still it's one of several places where green infrastructure does make a brief, though crucial appearance.

Businesses will get some relief, for example, in the form of a temporary 100 per cent capital cost allowance (CCA) rate for computers bought during the coming year, measures ensuring that firms have adequate access to credit, an increase in the loan limit for small businesses, support for the financing of vehicles and equipment, and increases in the lending of Crown corporations. Measures were also announced to strengthen markets in the agriculture sector, small- and medium-sized enterprises, and the tourism industry.

Federal social housing is to receive general renovations, energy upgrades, and improved access for persons with disabilities. First Nations communities will get a boost for social housing, schools, improved drinking water, health-care and policing infrastructure.

Derek DeCloet at the Globe and Mail takes the position that "The U.S., euro zone and Chinese economies are, put together, 22 times the size of the Canadian economy. They'll be leading the way out of this. We're passengers, mostly." He expresses specific concern that deficits not become chronic, that bailout money for the auto industry and forestry be short term, and that growth in program spending be limited to population growth plus inflation. (Jan 27 09)

In a Toronto Star article, Hugh MacKenzie, an economist at the Canadian Center for Policy Alternatives, argues that political considerations have driven the Harper government to measures which it finds ideologically unpalatable and which it will abandon as soon as the political imperatives change. (See also the G&M poll, Jan 30 09) and CCPA alternative budget.

In the first place, Flaherty's fiscal stimulus is lower than comparable packages in other industrialized countries, and is only about two-thirds of what is recommended by the IMF. Mackenzie doesn't accept Canada's role as "passenger," but believes that it will be guaranteed by having invested too little and in the wrong places.

He argues that "the stimulus provided by tax cuts is swamped by the stimulus provided by infrastructure spending.... and reduce[s] fiscal capacity permanently, thereby making it even more difficult to pull Canada out of deficit in the future." He would spend more on EI and keeping businesses running in the resource and manufacturing sectors.

He criticizes Harper's infrastructure spending because the Feds fail to spend "first dollar," and because the program is "unfocussed" and lacking in a goal or overall theme. (Jan 28 09)

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