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Federal Budget 2016: A One Time Fix?


The Budget reinvests significantly and appropriately in many important government programs broadly in line with the promises made in the Liberal platform. However, it falls short in some important areas, and the biggest failure is to restore federal fiscal capacity to support improved social programs and public services over the long term.

The bottom line is that the Budget increases federal government program spending from 13.6% of GDP in 2015-16, the last year of the Conservative government, to 14.6% of GDP in each of the next two fiscal years. This represents a significant increase in spending of about $20 Billion in the coming year, 2016-17. Program spending is, however, forecast to gradually decline as a share of GDP back to the 2015-16 level after the next two years.

On the other side of the ledger, government revenues fall a bit from 14.6% of GDP in the last year of the Conservative government to 14.4% in 2016-17, and stabilize at 14.5% of GDP thereafter.

As a result of increased spending combined with the hit to revenues from the so-called middle class income tax cut (which favours affluent earners), the deficit rises in 2016-17 as does the federal debt to GDP ratio, which increases from 31.2% in 2015-16 to 32.5% in 2016-17, and is then forecast to fall slightly moving forward.

Given a soft economy and rising unemployment, the government was right to abandon its original promise to reduce the debt to GDP ratio in every year of their mandate, rather than to abandon most of their spending promises. Still, the point remains that they made a lot of election promises without having a realistic plan to deal with the cost over the medium and long term.

The government is right to argue that new spending on infrastructure and benefits for low income families will boost economic growth modestly (by 0.5% increasing to 1% in the second year.) And their fiscal plan is based on a worst case economic growth projection.

Still, the fact remains that the increases in program spending over the next two years are, in total, only temporary. This is inevitably the case given a weak forecast of medium term economic growth, the commitment to reduce debt as a share of the economy after a one time increase in this fiscal year, and given the government’s failure to boost fiscal capacity.

On the tax side, Mr. Morneau has promised a crackdown on personal and corporate tax evasion and a review of the tax system, which is welcome. But he has ducked a promise to review special tax treatment of stock options, and proposes only modest changes to inappropriate use of the low tax rate for small business by high income professionals. He has ruled out increases to the corporate tax rate, despite noting in the Budget that business investment even outside the energy sector remains very weak.

On the spending side, the government has delivered on its promise of a significantly larger and better targeted system of child benefits, which will reduce inequality and poverty. They have also delivered on the promise of an increased Guaranteed Income Supplement (GIS) for very low income single seniors, though couples in poverty and even many single GIS recipients will not qualify for the increase.

The government has largely delivered on its promise to widen eligibility for Employment Insurance benefits, and will temporarily increase the duration of benefits in the regions hit hardest by the collapse of oil and mineral prices. Student aid will be significantly improved.

However, the government has not lived up to all of its platform promises. The total amount of infrastructure spending for this year, 2016-17, falls about $2 Billion short of the $5 Billion that was promised, even though there will be a focus this year and next on projects which can be initiated quickly. We get a lot more detail on spending, and the increases in areas like transit, affordable housing, child care and green infrastructure are most welcome, but the overall program is less ambitious than promised.

The Budget also fails to announce any details of a promised new health accord with the provinces, which will have to be funded in the next Budget, if not sooner, given the pending expiry of shared cost arrangements. The platform had promised an increase of $415 Million this year.

The government has announced amounts to be spent that fall well short of the platform when it comes to youth job creation and worker training.

The Budget addresses many pressing social and environmental issues. But the fiscal plan is built on shaky foundations that will need to be shored up through progressive tax reform.

Andrew Jackson is senior policy adviser to the Broadbent Institute.