Cardus Budget Analysis: Good News for Economy, Ho-Hum for Society

March 22, 2011 - Ray Pennings and Robert Joustra

Introduction

This is Cardus' analysis of the Government of Canada's budget for the fiscal year 2011-2012, released by the Hon. James M. Flaherty, Minister of Finance on Tuesday, March 22, 2011. There is some good news in this budget: deficit projections provided by Minister Flaherty last fall have proven overly dour. Canada's recovery, in raw economic terms, is a picture of success. This budget is filled with reminders on how well Canada is doing compared to international competitors in recovering from the recent economic challenges.

Whether this budget, which contains a quite a few steps that are designed to appeal to the opposition, is adequate to receive political support and be voted into reality remains an open question, but the details of the budget deserve consideration since if the government survives, this the blueprint that will shape our landscape for the year to come. Budget is policy, says the old political axiom. So what sort of moral and social vision is projected by this budget?

Key to our analysis is what we call a four sectors approach to the Canadian economy. A traditional three-sector approach—private, public, and non-profit—drives most economic commentary.

It is our argument that the private-public, for profit/not-for-profit lenses more commonly used in are insufficient in capturing on-the-ground realities. Think about health care: the private-public debate with a supplementary role for not-for-profit agencies does not capture the critical but informal caregiving that takes place in families and is supported by extended communities (including neighbours, church members, friends). This contribution is personal but it has very public consequences—as we certainly realize the moment those support structures are not in place. This is not only true in health care but increasingly in many aspects of our society. Our economy depends on more than profit, government, and even charity. At our social foundation are communities which can be neither bought nor sold, legislated nor volunteered. In this analysis we use a four sector approach to consider the budget's impact on:

  1. Natural communities, such as families
  2. Social enterprise, voluntary and charitable groups
  3. Private, for profit
  4. Public, government

Our core argument is that economic vitality is not the product of any single sector, but a by-product of robust interdependency between sectors, both those qualified as economic and those not. A four sectors approach should therefore be characterized by interdependency rather than competition or discrete productivity. For the fiscal house to be balanced the capacity of these sectors needs to be simultaneously optimized. None of the sectors of the economy has a monopoly on its vital signs, and increasingly it is becoming clear that turbulence in one means significant shortfall in another.


1. Natural Communities, Families

A widening consensus on the foundational role of families and natural communities came to some minor fruition in this budget. With demographic alarm bells ringing in policy offices across Canada, the government has taken some modest measures to ensure the resilience of families and natural communities.

Various targeted initiatives in the budget will provide further support to families. These include the introduction of a new Family Caregiver Tax Credit, a 15% non-refundable credit on amounts up to $2,000 for those who provide care for dependent relatives. There is also a removal of an existing $10,000 cap on the claiming of medical expenses for caregivers. The budget also introduces a new $500/child arts credit for children under the age of 16.

Considerable attention has been paid to increasing the support for seniors, as this was one of the key conditions that the NDP had highlighted as determinative of whether they might support the budget. The government increased the Guaranteed Income Supplement (GIS) that will provide $600/year to single seniors and $800/year for couples, a benefit that the government claims will help 680,000 Canadian seniors.

The federal government has been flirting with the principle of income splitting since its 2006 introduction for seniors. Subsequently the government introduced pension income splitting, allowing seniors and pensioners to allocate up to one-half of eligible pension income to their resident spouse or common-law partner for tax purposes. There have been rumours that the government was considering the extension of income splitting to other Canadians, however this was not included in the budget. The principle of income splitting is to balance the tax paid per household among the dependents it supports, effectively removing the tax premium that single-earner households pay compared to households with the same income divided among multiple income earners.

This has been cited by some as a strategy to help deal with demographic challenges. France, for example, has had income splitting for years. Rare among the barren nations of Western Europe, France has a fertility rate of 1.9 children per woman, almost equal to the replacement level of 2.1. This good news became the subject of media reports in 2001, when reporters noted "France's baby boom." Researchers at the French Institute for Demographic Studies concluded that the birth rate had risen by 5% that year, and attributed this at least in part to family-friendly government policies. More comprehensive income splitting strategies remain ripe for parties to use as a policy plank in any future election.

Creative policy interventions on national poverty and housing strategies, however, are conspicuous by their absence. While extensive and productive work has been done to ensure a revitalized private sector, this is a conspicuous and damaging gap in this government's budgetary policy.

An all-party committee report "Federal Poverty Reduction Plan: Working in Partnership Towards Reducing Poverty in Canada " contains some suggestions that are clearly politically motivated and difficult to follow-through, but also includes some practical measures especially relating to literacy and mental health that provide workable, incremental steps. These are consistent with the government's overall poverty strategy that focuses on labour market participation, ensuring economic security and housing.

It is not, we hasten to add, the place of a federal budget to redistribute wealth on a national scale, but it is surely—minimally—its task to recognize where those fault lines exist, and propose creative, even if conservative, policy interventions. While it is true that an economy without a vibrant private sector has no foundation, it is surely also the case that any society with widening concentrations of wealth and a struggling middle class is unhealthy. The struggling vitality of natural communities, while hardly an exhaustively economic problem, will eventually feed back into a compromised private sector.


2. Social Enterprise, voluntary and charitable sector

Volunteerism and charitable giving have become mainstream political concerns in the last several years, provoking national commentary and analysis by many groups, including Cardus. The decline in both giving and volunteering is more than a minor economic concern, accounting as it does for 8.5% of Canada's GDP. Studies on social enterprise in this sector also consistently show higher efficiencies, greater local knowledge base and integration into the communities served.

More significant, perhaps, is the cultural consensus that these numbers represent. Canada's civic core, the small percentage of Canadians who do a disproportionate amount of volunteering and giving, is shrinking. While public policy cannot legislate virtues like generosity and volunteerism, it can certainly create the conditions under which citizens are encouraged to and rewarded for those activities.

There are no budget measures that deal directly with tax credits for the charitable sector, as the budget notes that the government looks forward to the results of the forthcoming House Standing Committee of Finance report on charitable donation incentives. There are some new measures regarding the regulation of charities, with a view to enhancing transparency and providing tools for the CRA to deal with fraud.

Post-secondary education and the knowledge economy were given a significant boost in this budget. The $2.7 billion annual research budget distributed through the three granting councils (NSERC, CIHR, SSHRC) was increased by $37 million. The government also announced that it will be investing $53.5 million over five years for the creation of ten more Canada Excellence Research Chairs (in addition to the 19 that have been created since 2008). Various initiatives to assist students are also included, both those in university education as well as for apprenticeships and other professional tracks.


3. Vocation, private for-profit

The story of the profit sector in Canada is the anchor of the government's confidence in this federal budget. International indicators confirm a strong investment climate. The Organization for Economic Co-operation and Development (OECD) improved Canada's 13th place ranking in 2006 and 2007 to 6th in both 2008 and 2009. Canada's actual performance deteriorated, but relative to its peers Canada's recovery has been far stronger and its recession milder. 2010/2011 saw a slight dip in that rating as other countries began more comprehensive recovery.

Yet Canada remains a safe place to do business. While not insulated from the European debt crisis, confidence in the Canadian dollar and its business sector has been high. A robust package of targeted unemployment and apprenticeship measures is designed to keep that picture looking rosy. The federal government framed the budget as a "low tax plan for jobs and growth." There are no across the board tax measures (including, as expected, no change in the government's perspective on the $6 billion of previously announced corporate tax cuts, which the Liberals have suggested should be reversed) but a series of targeted deductions and an announcement of a $33 billion seven year "Building Canada" plan which focuses on "gateway projects" that will facilitate trade.

Overall, this government is managing a competent recovery for the private sector, underselling projections with restrained estimates. While public debt remains a significant concern, the economic consensus seems to be that the Canadian economy is indeed on track to grow its way back into a federal surplus, sooner rather than later.


4. Public, government

A substantial package of corporate tax cuts and recessionary stimulus, along with relatively conservative projections in income and spending, has allowed the government to continue with its projection of returning to a surplus budget position in 2015. This projection is being made on the basis of strong revenue and GDP projections and a restraint in the growth of government spending (although in absolute terms, the spending will continue to increase each year.) The deficit for 2010-11 is projected at $40.5 billion.

Are these predictions made with confidence? TD Bank predicted a deficit this fiscal year of only $39.5 billion and C.D. Howe, in its shadow budget, predicted a similar target deficit for 2010-2011.

The sharpest criticisms of this government's detractors are that significant cuts, especially in corporate taxes, have systemically reduced the capacity of government. The $6 billion dollar question on GST and corporate cuts is this: what is it that we expect from our public sector? Has a lower tax agenda lessened the capacity of the federal government to respond to the issues which Canadians expect them to address?

These expectations are not academic exercises. C.D. Howe estimates that the unfunded liabilities of pension plans for federal government employees are enormous, possibly $65 billion higher than reported amounts in public accounts (Laurin and Robson, 2010). Demographically our health care system is in for a related crunch, as hospital beds are overwhelmed with elderly patients. How will the federal government deal with these challenges when the current health accord expires in 2014?

The infrastructure investment begins to address some of the concerns regarding physical infrastructure but there are few similar measures when it relates to social infrastructure.

Intergovernmental transfers are a key feature of federal budgets. This budget makes permanent the investment of $2 billion from the Gas Tax Fund which will help municipalities plan their long-term infrastructure funding more effectively. It does not address the matter of the transfer payments to provinces, including the matter of reaching an agreement with Quebec, which was the key measure the Bloc Quebecois has sought if it were to support this budget.


Conclusion

Whatever the political fallout of the 2011 budget, the government of Canada needs to focus more attention on balancing the architecture of the Canadian economy. Private sector recovery is proceeding apace, and the government deserves credit for managing greater than expected returns. However, long term structural issues remain worrisome. The public debt, especially as it relates to entitlements and health care, may yet prove a bigger challenge than the recession itself. Further, this is compounded by serious cultural and moral challenges, in rates of giving and volunteerism, in the strength of Canadian families, and in the widening gap between rich and poor.

These problems cannot be exhaustively addressed in any federal budget, but if the overall strength of Canadian society is our goal then creative policy interventions will be required on these issues. If the recent recession has taught Canadians anything, it is surely that degradation in one sector will inevitably feed into the others. It is not the task of government to fix or pay for the challenges faced in the other sectors but it is in a unique leadership position to establish a policy and fiscal framework that enables each to fulfill its public task. There may be more creative energy in the government tank, but this budget didn't show it. Whether it will show up in an election to come, time will tell.

Posted in Politics. Linked to Cardus' Work and Economics research project.

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Originally Published

date: March 22, 2011
publisher: Cardus