Budget 2010: A second year of stimulus spending

Paul Vieira, Financial Post 

OTTAWA — The Conservative government sketched out on Thursday its initial plans to return to budget balance, by targeting cuts in the public service, a freeze on foreign aid, limited growth in military spending and higher EI premiums.

The spending restraint, outlined in its 2010 budget, would net $17.6-billion in savings over five years and bring the deficit down from a high of $53.8-billion this fiscal year, ending March 31, to a low of $1.8-billion by 2015.

Before the cuts kick in, however, the Conservative government said it was committed to spend $19-billion as part of year two of the two-year $47-billion stimulus package aimed at resuscitating the economy after the global financial crisis.

The 451-page budget sets out how the Conservatives plan to meet all its goals — of creating jobs and bolstering Canada’s long-term competitiveness, while at the same time returning to surplus without tax increases, nor cuts to transfers to provinces and individuals. The government also said it would go through with cuts to corporate income taxes, from 19% to 15% by 2012, despite calls from opposition politicians to cancel them and use the money to help seniors and the poor.

“We are building Canada’s reputation as an investment-friendly country,” Finance Minister Jim Flaherty said in his budget speech. “A country committed to free and open trade, unburdened by massive debts and [the] higher taxes of our competitors.”

All the opposition parties vowed to vote against the budget — although Liberal Leader Michael Ignatieff said his party would not bring down the government and force an election by withholding the number of Liberal MPs who show up to vote.

Even though Canada’s economy is recovering at a rather robust clip of late — 5% growth was recorded in the final quarter of 2009 — Mr. Flaherty said following through with more stimuli is the right thing to do as the global recovery is in its nascent stages.

Measures linked with the stimulus plan will expire as of March next year, and with it comes a plan to return to budget balance.

Overall, analysts said the budget struck a fair balance between adding momentum to the recovery from a deep recession, and preparing the economy for fiscal restraint.

“It is not a dramatic change of course, and in uncertain economic times you want a steady hand. And we are getting a steady hand,” said Craig Wright, chief economist with Royal Bank of Canada.

For some, such as the NDP, there wasn’t enough money to help the unemployed or the poor. Others said there wasn’t enough on the spending-cut side.

“A plan to balance the budget should actually balance the budget and this doesn’t do that,” said Kevin Gaudet, federal director of the Canadian Taxpayers Federation. “Restraint delayed is restraint denied. Taxpayers have heard similar promises of restraint before. Canadians will believe it when they see it.”

There were some new spending measures, although minor, such as extending a work-sharing program at a cost of over $100-million, and eliminating all tariffs on imported industrial inputs at cost of $1.2-billion over five years.

According to the government’s plan, the $53.8-billion deficit will be cut in half in two years time, and by two-thirds in three years. Much of that will be due to allowing the stimulus plan, and its associated measures, expire in March 2011.

The government envisages robust growth in revenue, starting in the 2010-11 fiscal year, and will grow thereafter based on, among other things, four consecutive years of higher Employment Insurance premiums, which business leaders describe as a payroll tax.

Economists at Toronto-Dominion Bank have calculated that EI premiums will rise from the present $1.73 level to $2.33 by 2015, in an effort to return the EI account to balance. As a result, that will contribute nearly one quarter to the overall improvement to federal revenue over the next half decade, they said in a note.

On spending, the government will introduce legislation to freeze the salaries of all MPs and Senators for the next three fiscal years.

Also, Ottawa is eyeing $6.8-billion in savings through containing the operating costs of federal departments. Departments’ operating budgets will be frozen in 2011 and 2012 at 2010 levels. Further, a 1.5% wage increase owed to unionized workers in 2010, at a cost of $300-million, has to be funded through cuts within departments.

The government also plans to cap growth in defence spending, which doubled to $20-billion in the previous decade. Restraint doesn’t begin until 2012, and the efforts aim to achieve savings of $2.5-billion by 2015. Meanwhile, foreign aid will reach $5-billion this coming fiscal year, and increase no further, and be subject to review on a year-by-year basis.

Overall, after the stimulus package expires, program spending is set to increase at on an annual basis of between 1.5% and 2.5%. This could be quite the feat, as prior to the recession program spending grew at roughly 6% to 7% a year.

Douglas Porter, deputy chief economist at BMO Capital Markets, said the government’s plan is banking on a well-entrenched U.S. and global economic recovery as of next year to smooth the way toward stimulus removal.

“The big question mark is whether the economy can withstand the abrupt removal of stimulus a year from now,” he said. “To me, that’s the real test.”

The budget’s underlying forecast envisages economic growth of 2.6% this year (below the Bank of Canada’s forecast), 3.2% in 2011 and 3% in 2012.

At a media conference during a lockup for reporters, Mr. Flaherty said if the economic growth projections fell short, his government was prepared to “do more” in terms of spending restraint. http://www.financialpost.com/news-sectors/story.html?id=2636923

Budget Highlights

Projected deficit for current year (2009-10): $53.8-billion

• Deficit for 2010-11: $49.2-billion

• Total spending: $280.5-billion

• Program expenses: $249.2-billion (an increase of 4.7% over 2009-10)

• Debt charges: $31.3-billion

• Total infrastructure project spending: $7.7-billion

• Elderly benefits: $36.7-billion

• EI benefits: $22.6-billion (compared with $16.3-billion in 2008-09)

• Health and social transfers to provinces: $37.1-billion

• Transfers to municipalities: $2-billion

• Total federal debt: $566.7-billion

• Personal income tax to be collected: $117-billion

• Personal income tax cuts: $3.18-billion

• Corporate income tax to be collected: $22.3-billion

• Total excise duties and GST to be collected: $188.9-billion

• Savings from “containing administrative cost of government”: $300-million

• Administrative savings, 2011-12: $900-million

• Savings from “closing tax loopholes”: $355-million

• Total increase in funding for scientific research and post-secondary education: $1.88-billion