Federal budget lacks big picture thinking

In many ways Tuesday’s federal budget wasn’t all that surprising. Many of the government’s key initiatives were already announced (the so-called “Family Tax Cut” package) or telegraphed as part of the Conservatives 2011 platform (raising the TFSA annual contribution ceiling to $10,000). The remainder included a smattering of relatively smaller initiatives to satisfy various interest groups in advance of the federal election.

What it lacked, and what Canada so desperately needed, was a robust, big-thinking budget to push Canada’s economy forward.

Start with the biggest news item in the budget: the fiscal balance. Finance Minister Joe Oliver and fellow Conservative politicians had long trumpeted the return to a balanced budget this fiscal year, ending a seven-year period of consecutive deficits totalling nearly $150 billion.

With an election approaching, the government’s position obviously did not waver, despite sliding oil prices and the expectations of a weakening economy.

While the Conservatives should be credited for remaining steadfast in their position to return to balance (few governments internationally and within Canada have shown the same commitment), there are reasons why the fiscal balance is far from certain.

In order to achieve the $1.4 billion “surplus” in 2015/16, the government is partly relying on asset sales (including a $2.1 billion net gain from selling GM shares). This reliance on one-time revenue sources casts doubt on the balanced budget claim.

In addition, the government has lowered the annual cushion in its fiscal plan relative to last year’s budget. The government had previously built in a $3 billion annual cushion to protect against unforeseen risks; the cushion was cut to $1 billion for the next three years.

In light of falling projected economic growth, now is a risky time to reduce the cushion, especially with razor thin surpluses.

But the real drawback with this budget is the lack of strong economic vision for Canada. While there are positive things like the announcement to expand the annual room for TFSA contribution, it missed the opportunity to truly set the foundation for stronger economic growth and higher living standards for Canadians.

Put simply, the policies outlined in the budget simply do not give Canada the economic shot in the arm it needs. It was last year’s budget that stated “the Government’s plan to return to balanced budgets is not an end in itself, but a means to increase Canada’s economic potential, improve employment opportunities for Canadians, and raise our standard of living.”

Budget 2015 does little to achieve these ends.

On the revenue side, much was made about tax reductions in the budget, but the budget actually increases the federal tax burden. Specifically, tax revenues will increase from 11.4 per cent of GDP last year to 11.8 per cent in 2015/16 and to 11.9 per cent in 2016/17.

To help weather the cloud of uncertainty hovering over the Canadian economy, the government could have undertaken a variety of pro-growth reforms. For instance, it could have enacted broad-based tax reform in the form of lower personal income tax rates to improve Canada’s competitiveness and strengthen our economy by encouraging productive activity like increased work effort, saving, investment and entrepreneurship. And the fiscal room for such reform could have been achieved by cleaning up the tax code and doing away with several boutique tax credits, which increasingly populate our tax system and make it complex.

Alternatively, the Conservatives could have reduced capital gains taxes, which apply to the sale of assets when the selling price exceeds the original purchase price. This may not be the sexiest policy topic heading into an election year, but the reality is that capital gains taxes impose enormous economic costs and bring in relatively little revenue in return (just 1.1 per cent of total federal revenues).

Instead of bold, pro-growth ideas, the Conservatives choose a largely status quo and stay-the-course budget. It may not have been surprising, but it certainly wasn’t inspiring.