Cardus' 2009 Federal Budget Analysis: Stimulus Package Requires More than Money

January 27, 2009 - Ray Pennings and Michael Van Pelt

(Click here for the official Cardus press release on the 2009 Federal Budget)

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Introduction

This is Cardus' analysis of the Government of Canada's Budget for fiscal year 2009-2010, released by the Hon. James M. Flaherty, Minister of Finance, on Tuesday, January 27th, 2009. This budget provides only a short-term solution for a long-term problem, leaving the fundamental questions facing Canada's economy unanswered. It would appear that the government is responding to the public's exaggerated expectations of what federal spending can fix. The need to address our over-reliance on credit, our demographic challenges, and to renew our social architecture has been basically left untouched. Canadians continue to borrow from the future to maintain the ways of the past.

In keeping with our analysis of previous budgets, we do not address all matters raised in the federal budget. Our analysis takes place in the context of Cardus' mission to promote the renewal of Canada's social architecture. The task of government is neither minimalist (that is, only a narrow focus on essential duties such as security, safety and core government services) nor expansionist (where government is prepared to jump in and solve every problem for which there is a political advantage in addressing.) The state should always be limited in its scope. The state is not responsible for everything. The state is the guardian of the public good but should defer to other institutions of civil society which are often better placed to deal with particular issues.

It needs to be acknowledged that this federal budget cannot be properly analyzed without acknowledging the unusual political and economic context in which it is given. There has been extensive public debate in recent months whether it is preferable for government to attempt to stimulate the economy through infrastructure spending or to attempt to stimulate the economy through tax measures. It is clear that regardless of what position one might take philosophically, the fact that most of Canada's trading partners have opted for a Keynesian type of stimulus package combined with the fact that all of the opposition parties in a minority parliament favour this approach limited the options available to the government.

The recession we are presently facing is unprecedented in its global reach. In the developed world, an increasing number of people are living leveraged financial lives, placing higher demand and reliability on credit. Credit presumes optimism on future capacity to earn and pay back. When credit structures fail, as some high-profile American banks did during 2008, the domino effect is felt throughout the system.

This budget is premised on presumptions of average GDP growth of 3.88 over the next 5 years, which will provide the means to repay the $85 billion of additional debt the government proposes to take on during that period. It is impossible to know the reliability of these predictions, however in looking longer-term, there are at least three factors which neither the public debate nor this budget directly address:

  • Canada's demographic challenge. Our reproductive rate of 1.7 children per female, while comparable with many of our trading partners, falls short of the required 2.1 rate necessary to maintain the population. We are just a few years from the time when the annual retirement rate will exceed the rate of young people entering the workforce. Presumptions of growth in the economy must factor in the workforce demographic effect.

  • The limits of measurements. Spending on casinos is not the same as spending on bridges or power plants, even though in short-term GDP measures, one cannot distinguish between them. The real value of the measures contained in this budget will be determined more by qualitative than quantitative factors. There is some debate about the speed in which this money needs to be spent, and whether prudent choices will be made about the most effective long-term return on this infrastructure investment.

  • The effects of social confidence and support. Much of economic activity has to do with attitude and confidence as much as ability. In the recession of the early eighties, consumers and businesses were willing to take on loans at very high interest rates. In the current recession, there is concern about their willingness to borrow money at historic low rates. Given recent changes in historic social structures (mobility, family breakdown, "bowling alone" factors, less volunteerism, weakened civic institutions), the economic challenges will exacerbate many personal issues. Dealing with these demands is a function of the healthy involvement of many social institutions in society; however when they fail or lack capacity, the cost is one that is borne by society as a whole.

Our economy is undergoing fundamental structural changes, most of which are beyond the power of government. The government's tasks are to ensure the resizing is orderly, and to provide stability for those impacted by these structural changes.

The budget adopts a multi-faceted approach in its attempt to stimulate the economy. The key components include:

  • Improving Access to Financing and Strengthening Canada's Financial System with $200 billion to improve access to financing for consumers and businesses;

  • Action to Help Canadians and Stimulate Spending with $8.3 billion on various programs directed towards individuals directly affected by the economic downturn, and $20 billion of tax relief;

  • Action to Stimulate Housing Construction with $7.8 billion to build social housing, encourage home renovations, provide low-cost loans to municipalities for housing related construction, and energy related incentives;

  • Immediate Action to Build Infrastructure with $12 billion of new funding projects with a focus on projects that bolster Canada's long-run productive capacity;

  • Action to Support Businesses and Communities with over $4 billion for a wide variety of sector-specific initiatives, including Forestry, Agriculture, and Automotive sectors.

The budget proposes a $34 billion deficit for Canada's 09-10 fiscal year (April 1, 2009 - March 31, 2010) and a $30 billion deficit for the 2010-11 fiscal year. By a combination of time limits attached to various spending initiatives and the expectation of economic recovery increasing tax revenues, the government suggests that it will be once again be able to produce a balanced budget in 2013-14. The budget highlights the government's commitment to return to surplus by carefully managed spending, by reviewing departmental programs and corporate assets, and also by concentrating the bulk of the initiatives as time-limited "use it or lose it" programs.


Charitable sector

The economic importance of the non-profit sector is often overlooked. However with $112 billion per year of annual revenues employing 2.1 million Canadians, this sector makes up 8.6% of GDP and its economic health is of general significance. These numbers are somewhat misleading in that this data collection category includes universities, colleges and hospitals. (most of whom rely on revenues from charitable foundations for a portion of their revenues but receive the bulk of their revenues from government funded operating grants) However apart from this component, the charitable sector is an estimated 4% of GDP.

There were various proposals submitted during the pre-budget consultation period recommending that the government include measures for this sector in its stimulus package. One of those submissions was from Cardus suggesting that charitable tax credit for individual donations in excess of $200 be increased from the present 29% to a proposed 42%. There were no measures in the budget relating to this sector.


Analysis

Rather than attempt to comprehensively summarize all of the budget measures, Cardus has reviewed the budget using the lens of three major questions:

  1. Is the overall budget a reflection of short-termism or longer-term economic thinking?

  2. Is there a broader view of infrastructure beyond physical infrastructure?

  3. Is the budget fair and equitable for Canadians across our diverse landscape?


1. Is the overall budget a reflection of short-termism or longer-term economic thinking?

This budget attempts to do both. With a $30 billion stimulus spending package (which when reflected as a percentage of GDP, is one of the smaller stimulus packages globally), the government has responded to international (G-20) pressure, political pressure, and a general belief that government spending will have beneficial outcomes. The expectation of the budget is that this stimulus package will assist the economy coming through this downturn, and in a few years time, will position Canada to continue on a road of steady growth.

The budget emphasizes that "measures to support the economy must begin within the next 120 days to be most effective." While the stimulus reasons for this are understandable, it undermines the planning and considered choice of strategic projects (including building community support and fundraising for community centers, recreational facilities, etc.), and also will result in a less efficient competitive process.

On the other hand, the proposed tax changes do represent a longer-term approach. By reducing the tax burden for individuals and families in Canada as well as for the business community, Canada's tax regime will become more competitive and provide us with comparative advantages with our trading partners.

It must also be acknowledged that a considerable investment is proposed in the skills and training programs which do increase Canada's knowledge base, as well as in green technologies.

Fundamental longer term issues such as Canada's demographic challenges, and measures that would strengthen and increase the capacity for institutions between government and the individual to thrive (such as increasing charitable tax credits), are conspicuous by their absence.


2. Is there a broader view of infrastructure than just physical?

The government has rightly focused on the development of the workforce in an attempt to build a "knowledge economy." A variety of measures are proposed including:

  • Wage earner protection program for eligible workers;

  • Strategic training and transition fund for workers who have been out of work for a longer period of time;

  • A $2000 tax credit for workers who complete their apprenticeship program;

  • Various initiatives with universities and research agencies to develop Canada's knowledge advantage.

All of the proposed initiatives are commendable, but it should be noted that most of them focus on individual benefits. There should be more focus on developing capacity for community groups, labour groups, and industry associations - groups which are often closer to the front lines and able to provide niche services and programs. In short, these initiatives reflect an over-reliance on government, rather than sound strategies for Canada's social architecture.


3. Is the budget fair and equitable for Canadians across our diverse landscape?

Economic hard times produce pain and the government has taken significant steps in an attempt to ameliorate the suffering that many Canadians will experience. While recognizing that these will continue to be difficult times, the budget has numerous specifically-targeted tax measures, employment transition measures, and industry-specific funds which are intended to help those most affected. Targeting tax relief measures for those in lower and middle income brackets are also an appropriate response.


Conclusion

In the period leading up to the federal budget, there has been a disturbing public appetite expecting governments to solve problems that are beyond their capacity to solve. Many aspects of the present economic crisis are not related to government causes. The public has not come to grips with the global economic restructuring that is taking place. It is not just our environmental frameworks that require adjustment. Our social (Who cares for whom? Who is my neighbour?), family (Do I have kids? Does it matter what I pass on to them?) and moral frameworks require adjustments too. The moral dimensions of this crisis are illustrated by consumer greed, a willingness to live beyond our means and irresponsible risk-taking by business leaders.

It is difficult and even unfair to criticize our political leaders for responding in limited ways to a crisis that has much deeper roots than politics or even economics. The challenges facing Canada and most of its trading partners are fundamentally about how we organize society and what we expect from life. This budget has bought us a few more years to think about these questions while we borrow from the future to maintain the ways of the past. The success of this budget will be determined by how well we all steward this opportunity.


Further Analysis Forthcoming

Cardus will be conducting a review of the various budget analyses that are released immediately following the budget. A special budget issue of our policy journal, Cardus Policy in Public will be published on-line by 8 a.m. EST on Thursday January 29, 2009. Please check the Cardus website at that time for this further analysis.

(Click here for the official Cardus press release on the 2009 Federal Budget)

Posted in Business, Industrial Relations, Markets, Politics. Linked to Cardus' Work and Economics research project.

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Originally Published

date: January 27, 2009
publisher: Cardus