Published in the Globe and Mail on April 21, 2015
By: Alexandre Laurin
Alexandre Laurin is director of research at the C.D. Howe Institute
Budgets, especially pre-election budgets, inevitably respond to short-term concerns and special interests. This budget is no exception. A prime example is the creation of a new fund to celebrate Canada’s 150th anniversary dedicated to the renovation of community infrastructure across the country, or yet another tax credit targeted to seniors. Over time, though, successive annual budgets write much of our fiscal and economic history – how much the government spends, taxes, and accumulates debts, and how well (or badly) fiscal policy has supported long-term growth.
The budget contains many short-term, targeted measures that will attract attention. Reduction of the small business tax rate from 11 per cent to 9 per cent will generate business-friendly headlines, even though research-based evidence points to the tax preference hurting the overall performance and growth of the economy. Infrastructure investment in city transit is valuable but amounts are relatively small. The budget also contains its share of short-term corporate welfare measures, ranging from a few hundred millions dollars for the automotive, aerospace, agriculture, and tourism sectors, to the renewal of accelerated writeoffs for the manufacturing sector and tax credit for mineral exploration.
What really matters, though, are the measures that affect Canada’s path over the longer term – the elements future historians of our economic and fiscal history will identify as key in determining whether we stagnated or prospered. The government deserves praises for staying in the black despite taking a $6-billion hit to tax revenues as a result of collapsing oil prices. But projected surpluses are thin: they are mainly the result of a pleasant surprise – a significant decline in projected interest rates will yield more than $3 billion a year in lower debt charges – and of a $2-billion decline in the amount usually set aside for prudence. In this volatile economic environment, the medium-term sustainability of a healthy bottom line is uncertain, and does not leave much room for more future tax reliefs.
In the long run, the budget contains a variety of lower-scale measures aimed at supporting post-secondary education – enhancements to student loan programs, investments in aboriginal education, and investments in basic research infrastructure – that will pay economic dividends. In addition, two tax changes announced in this budget will make a significant difference in the lives of Canadians.
First, the retirement security of seniors will improve as a result of the reduction in minimum yearly amounts seniors are required to withdraw from their registered retirement income funds. Withdrawal requirements have not kept pace with improvements in life expectancy and decreasing real returns on secure investments. The budget’s 30-per-cent reduction in minimum withdrawal requirements will lessen the risk of seniors outliving their RRIF nest egg, even though greater reductions would have been required to completely insulate seniors from this risk.
Second, the almost doubling of the TFSA contribution limit will be of great help for low- to average-income earners wishing to save for retirement on a tax-efficient basis. It will also ease the pinch of very low interest rates for savers and seniors who, at the moment, must accept after-tax real returns on government bonds and GICs below the rise in the cost of living. More TFSA room will increase personal savings and support economic growth.
On the spending side, rigorous control of costs of government operations and transfer payments is essential to the delivery of good public services at reasonable tax rates. The government has done a good job in the last few years in containing its operating costs. But more needs to be done to contain the growing gap between federal employees’ compensation and their private-sector counterparts. In 2013, the government spent on average $64 per hour of work on federal employees, some 30 to 40 per cent more than private-sector employers on manufacturing, professional, scientific, or financial service jobs. Much of this gap is driven by the escalating financial burden of federal pension obligations, and capping Ottawa’s contributions to these pension plans at, say, 9 per cent of pay would be an apt place to start.
Over all, the 2015 budget should be well received by markets, and, in the context of a federal election approaching, will be seen as generally prudent. In the longer term, economic and fiscal historians will remember its fiscally responsible track, essential to preserving business confidence and support growth, and its contributions to the retirement security of seniors through TFSAs and RRIFs enhancements.
