In spite of the Conservatives’ seemingly credible efforts in the direction of addressing several key NDP demands, Jack Layton turned thumbs down on Finance Minister Jim Flaherty’s March 22 budget and ushered in the ongoing federal election. The consensus in the budget lockup, at least as I interpreted it, was that the specific olive branches devoted to NDP priorities (the revival of the popular ecoENERGY Retrofit " Homes program, the increase in the guaranteed income supplement, the Canada Student Loan forgiveness provisions for freshly minted doctors and nurses locating in isolated communities, among other provisions) would make it difficult for Layton to pull the electoral plug. However, in making what must pass for one of the most thorough condemnations of any budget, Layton ensured that Canadians were off to the polls.
The irony here is that Budget 2011 is arguably an excellent political and economic blueprint for the Conservatives to take into an election campaign. This is most obvious on the fiscal and economic front: Canada has emerged from the Great Recession as the premier performer among the G7 in a series of key indicators " employment growth, GDP/income recovery, regaining budget balance " and Canada also has the lowest net-debt-to-GDP ratio. Plaudits all around to our macro managers!
With details of Canada’s ongoing fiscal transition from the depths of the Great Recession back to (projected) budget balance, table 1 tells an intriguing tale. The four categories (budgetary revenues, program expenses, budget balance and federal debt) are of projections in the four budgets or economic statements since the last election: the misleading and near-disastrous (for the Conservatives)
November 2008 economic statement that, thanks to the Governor General, led to the prorogation of Parliament; the post-prorogation January 2009 budget called Canada’s Economic Action Plan; the March 2010 budget that finalized the second year of the two-year stimulus plan and iv) the March 22 budget titled The Next Phase of Canada’s Economic Action Plan: A Low-Tax Plan for Jobs and Growth.
The 2008 economic statement completely ignored the gathering economic storm and projected instead budget surpluses for the indefinite future. Contributing to the mounting concern about the budget’s complete misreading of the economic and fiscal reality was the major political gaffe of proposing to strip political parties of federal government election financing. Thanks to the GG’s mulligan, and after an unprecedented round of consultations (including with a blue-ribbon panel headed by Carole Taylor), not only did the January 2009 budget provide a comprehensive stimulus package but, in addition, Prime Minister Harper donned the mantle of G7 cheerleader for the need for a coordinated international approach to stimulus. A remarkable personal transformation! The reservation that John Allan and I raised at the time (Policy Options, March 2009) was that the budget was insufficiently transformative to meet the challenges of the emerging informatics era: namely, it put too much emphasis on boards and mortar and not enough on mortarboards.
This caveat aside, the one concern in the 2009 budget lockup was whether the budget projections for returning to budget balance by 201314 (i.e., a surplus of $0.7 billion) were credible. The projections from the 2010 budget lend some credence to this concern since budget balance is not even achieved by the end of the five-year planning horizon. To be fair, much of this was probably due to the worsening economic climate not fully anticipated in January of 2009. What is clear from a comparison of 2010 and 2011 is that more credibility is now attached to the scenario that Canada will soon regain budget balance. Indeed, it is as if Flaherty anticipated the views of CEOs in a ROB/BNN survey conducted by Gandalf Group that the economic recovery is strong enough that reinforcing the recovery rather than immediately paying down the deficit was the preferred approach. In other words, Flaherty’s focus was on staying the course and not taking extraordinary measures to hasten the return to fiscal balance, which has led the more conservative think tanks to take him to task for not moving more forcefully toward budget balance. In the event, Flaherty’s decision in the context of a growing economy left ample fiscal room to craft a budget that probably would have broad appeal on the hustings, should the need arise.
Prior to providing a more detailed overview of the budget, it is important to note that several knowledgeable observers do not share the view that the 2011 projections are credible. For example, the Parliamentary Budget Officer has concerns with the expenditure profiles of prisons and planes and two former senior Finance officials blogging at www.3dpolicy.ca suggest that restoring effective budget balance by 2014-15 is not achievable without much more in the way of expenditure cuts or tax increases or both. Even were the Conservatives to retain power, it is unlikely that they would reproduce the thrust of Budget 2011, so the credibility of the projections will never be completely resolved.
Electorally, the 2011 budget is likely to play well as both an economic and political platform. My one-line overview of this budgets repeats a quip made about an earlier federal budget by McGill economist Bill Watson, namely ”œSmall government, but lots of it!”
There is something for everyone so that no matter where in Canada Stephen Harper appears and no matter who the group or organization happens to be, the reality is that easily a majority of his audience will have benefited from one or more of the tax breaks, income increases and targeted provisions that proliferate in the pages of Budget 2011.
Organizationally, Budget 2011 develops policies in four major areas: supporting job creation; supporting families and communities; investing in innovation, education and training; and, of course, preserving Canada’s fiscal advantage. Beyond the usual comprehensive budget document, a budget in brief and the Finance Minister’s Commons speech, most budgets come with a set of glossy handouts suitable, for example, for distribution at political rallies. The four glossies accompanying Budget 2011, replete with myriad budget goodies, focus on seniors, on families and communities, on children and on caregivers. It did not take budget analysts long to note that these areas are likely to appeal to women, a group the Conservatives need to persuade if they hope to achieve a majority.
Budget 2011 is also very cleverly crafted. The overarching perspective, one that appears throughout, is, as already noted, that this budget is ”œthe next phase of Canada’s Economic Action Plan,” that is the next phase of the two previous budgets. What this allows Budget 2011 to do in each and every section is to review the details of the massive stimulus plan outlined in the previous two budgets as they relate to the issue at hand. Moreover, and clearly intentionally, it is not always very clear, even to a careful reader, where the provisions of the previous two budgets end and where the provisions of Budget 2011 begin.
However, the electoral genius of Budget 2011 lies elsewhere. By publicly positioning the government as not wanting an election and by acting on this positioning by crafting a document with the announced intention of attracting NDP support, the Harper Conservatives were able to table a budget that catered to a much wider than their electoral base would have otherwise tolerated.
All in all, quite a masterful achievement. The Conservatives may not have wanted an election, but, as noted, Budget 2011 was craftily designed to be an election budget if events so dictated, as they obviously have. In the immediate post-budget time frame the key decision of the opposition parties was whether to precipitate an election by voting against the budget or whether to go to the polls on the basis of voting non-confidence in the government on the various issues relating to electoral ethics, abuse of power, contempt of Parliament, etc. It seems the opposition preferred the latter, although the Conservatives wanted to have the ballot-triggering question focus on the budget. It is important to note that the choice need not have rested with the opposition: since the opposition had committed itself to defeating the budget, the Prime Minister could have used this knowledge to make the trip to Rideau Hall to seek dissolution. While waiting for the vote, the Conservatives were everywhere extolling the virtues of the budget that the opposition parties were denying to Canadians, so the precise issue on which the government fell might not be determining.
There is another vantage point for assessing the budget, one that would serve to qualify somewhat the above positive characterization: Budget 2011 is a federal document, but it ought to have been a national document. The budget is fully consistent with the Conservatives’ principle of ”œopen federalism” in that its focus is effectively only on section 91 or federal constitutional powers. As a decentralist I have a lot of time for an open-federalism perspective when it comes to respecting areas of provincial jurisdiction and I recognize the need for measures to constrain the exercise of the federal spending and regulatory power in areas of exclusive provincial jurisdiction.
This said, however, I also believe that open federalism cannot be the only operational principle in our federation. In this progressively informatics-based era, knowledge and human capital are central to increasing our future well-being, and our global city-regions have become the new dynamic economic engines and export platforms that spearhead the integration of the regions and provinces into NAFTA economic space and beyond. In other words, the new reality is that to an increasing degree issues that are in the national interest tend to fall within provincial jurisdiction. This implies that a budget document that focuses solely on concerns that lie in Ottawa’s jurisdiction cannot provide a comprehensive picture of our collective economic, fiscal and social futures.
It was clear that Prime Minister Paul Martin embraced the very antithesis of open federalism. For example, three of the four priorities in his post-election 2004 Throne Speech lay within provincial jurisdiction " cities, child care and health care " with the fourth (Aboriginal development) falling under federal jurisdiction. Admittedly, Martin’s blunderbuss approach to exercising the federal spending power via federal-provincial bilaterals, which the Economist referred to as ”œMr. Dithers and his fiscal cafeteria,” went way too far and way too fast. Stephen Harper went to the other extreme by undoing Martin’s spending and regulatory power initiatives and by adopting the principle of open federalism. Harper also vetoed Martin’s Kelowna Accord, although it was in Ottawa’s jurisdiction.
We need to create some middle ground where the budget can provide information and, on appropriate occasions, bring analysis to bear on a range of issues within provincial jurisdiction that, if left unattended, can have a deleterious impact on Canada’s overall fiscal, economic and social well-being and, indeed, on the federal budget itself. The counter to this from an open federalism perspective would presumably be that the provinces should follow Ottawa’s example and put their own fiscal houses in order and all will be well. To be sure, some provinces have done this or are in the process of doing so. With respect, however, the issues are more complex than this, although they are also and obviously politically delicate. Nonetheless, the reality that Ottawa will spend $58 billion on federal-provincial transfers should merit much more than a paragraph or two in the budget, let alone be essentially ignored. A few examples will illustrate this concern.
While a celebration of the federal government’s evolution toward a return to balancing the budget is certainly appropriate and expected, one might have also expected that Ottawa would point out that the fiscal position at the provincial level is considerably less rosy. For example, Ontario’s current budget in per capita terms and as a percent of its GDP is considerably larger than the current federal deficit. Indeed, Ontario’s fiscal position is also worse than that of California. And Quebec is in worse shape than is Ontario. And in the next fiscal year the aggregate provincial deficits will exceed the federal deficit. Whether appropriate or not, soon the provincial rallying cry will again be the need to correct the federal-provincial fiscal imbalance. Why does Budget 2011 not have a section that profiles the provinces’ fiscal positions, even if only for information purposes, so as to provide a more comprehensive picture of the role of governments in the Canadian economy.
Such information used to be included in the annual budgets.
It is easy to label Ontario as spendthrift and, therefore, to sy its voters and taxpayers deserve to a wallow their own fiscal mistakes. But again, the issues here are more complex. While the Equalization formula equalizes revenues, it does not equalize the ability to provide comparable public goods and services (as the Constitution stipulates) because it ignores the cost of providing comparable services in the various provinces. The results suggest that the other Equalization-receiving provinces can provide something like 20 percent more public services than can Ontario, with larger percentages still for the disadvantages faced by British Columbia. This suggests that something is awry with the way we approach Equalization, something that makes it difficult to provide comparable services at comparable tax rates. Surely this is an issue that will eventually end up at Finance Canada’s door. Yet there is a more important interprovincial equity issue at play here. Some energy or resource-rich provinces have overall revenues, after Equalization, that are several thousand dollars per capita above those of other provinces. If resource prices rise, as many predict, these per capita differentials will rise even further and we will begin experiencing a degree of inequality in public services or in comparable tax rates across provinces that, among other things, will run counter to our values and will inevitably increase pressures on the federal budget. It seems to me that our primary fiscal document ought to bring this to the attention of Canadians.
Admittedly these issues will be part and parcel of the upcoming renegotiations of the fiscal arrangements to be implemented in 2014-15. But 2014-15 is nearly upon us. A successful conclusion to this renewal ought to be near and dear to Ottawa’s fiscal heart since, as noted, its transfers to the provinces (essentially the Canada Health Transfer [CHT], the Canada Social Transfer and Equalization) for fiscal year 2011-12 will total over $58 billion. In olden days committees would have already been struck to hold hearings on the principles and substance of the renegotiations. In my view the 2011 federal budget fell way short here, but hopefully, Finance and Ottawa more generally can still create this debate with Canadians and not leave it to lastminute behind-closed-doors negotiations with the provinces, although some of this will be necessary even with a constructive open dialogue.
The fiscal as well as the societal stakes are extremely high here. It matters a great deal to social and fiscal Canada if the Canada Health Act is converted to a further transfer of personal income tax points to the provinces, which would move the federation in the open-federalism or watertight-compartments direction on the one hand; or whether, say, the CHT monies are put toward a federal pharmacare program that the provinces, via the Council of the Federation, recommended in July 2004 on the other. Similarly, the social services component of the Canada Social Transfer could remain as is, could be converted into a further tax-point transfer, could be rolled into an addition to the Canada Child Tax Benefit, or could even be converted into a refundable tax credit for adults as a move in the direction of a guaranteed annual income for Canadians, since we already have refundable benefits for children and seniors. Open federalism may be viewed by some as a principle, but so should a federalism that is open and transparent.
The upcoming reworking of the fiscal arrangements represents one of those potential societal turning points that can enhance our ability to accommodate the relentless and ongoing dramatic march of events, domestically and internationally. I readily agree that some of these concerns are better handled by green and white papers accompanied by opportunities for public discussion. But there is also room for the budget to have embraced and articulated, perhaps in a budget supplement, the current state of play in the federal-provincial fiscal arena, some of the underlying principles appropriate to bring to the reworking of the arrangements, and some of the challenges and choices that could be on the negotiating table. Were this to have taken place in Budget 2011, the ongoing public discourse would be dramatically different.
My final two examples have nothing to do with the fiscal arrangements, but have much to do with our fiscal and economic future. The first refers to the Dutch disease, so named because the Netherlands’ exports of North Sea oil so appreciated the country’s exchange rate that the high value of the currency clobbered the manufacturing sector. With energy and resource prices currently rising, the stage is now set for a further runup in our exchange rate as the resource provinces’ exports rise and they take the resulting revenues into their respective current operating budgets. The result of an appreciating loonie puts pressure on the Canadian manufacturing industry everywhere in the country. Might it not be a good idea if Ottawa provided incentives (hopefully positive but perhaps negative as well) for resource provinces to create their equivalent of ”œsovereign wealth funds” and to invest the export proceeds in international capital markets, which would then serve to moderate the exchange rate appreciation that would otherwise have occurred? This is the policy that Norway has adopted to deal with the Dutch disease. Albertans must be wishing that they had done this from Leduc onward, since they would now have one of the largest pools of capital apart from the few pre-eminent funds. But the lesson may be better late than never.
There would be additional benefits for the resource provinces. In the last energy price cycle, exchange rate appreciation moved roughly in step with the international energy price (in US dollars). This meant that rising energy prices did not lead to rising Canadian-dollar returns to the energy provinces. However, the moderation of the appreciation in the presence of provincial wealth funds invested internationally would result in rising Canadian-dollar returns from rising international energy and resource prices. Ottawa would also gain because the Canadian manufacturing sector would be more viable and because resource revenues and royalties invested in the wealth funds would not enter the Equalization formula until they are drawn into the provinces’ consolidated revenues.
The second example relates to carbon pricing and carbon taxes. Under a full-blown carbon pricing regime the resulting revenues will be huge, perhaps not far off the level of resource revenues themselves. So the fiscal stakes are obviously huge. But whose revenues are they? Peter Lougheed has alerted us that a fight over these revenues has the potential for a rerun of the divisive National Energy Program. Hence, it is perhaps not surprising that the 2011 budget is silent on this issue. But in the meantime the internal economic union as it relates to carbon pricing is being progressively balkanized, perhaps beyond easy repair. If Finance can use a series of federal budgets to create a case for taking over the provincially run securities industry on efficiency and Canadian economic grounds, then surely the term ”œcarbon taxes” should have the right to make an appearance in a federal budget!
In the final analysis these issues may well be better suited for green papers, white papers, House and Senate hearings and the like. Nonetheless, given that the budget is Canada’s premier fiscal document it seems obvious and appropriate that it also bring national fiscal issues to the attention of Canadians. As it happened, Budget 2011 was long on breadth but short on depth, the result of which was that media lockup participants had completed their required reading and comprehension of the budget by 11:30 or, at the outside, by noon. For the remaining four hours, the several dozen Finance officers who stood ready to answer any and all questions found themselves devoid of customers. Were the budget to have embraced aspects of the national dimension of Canada’s fiscal challenges, not only would the Finance officials have been over-burdened with questions but Canada’s media elites would have spent several hours discussing and debating alternative fiscal futures for our nation. This may have been the start of something grand, to steal another quip. Much would have been gained if Finance Minister Flaherty had delivered a national budget to accompany his accomplished federal budget.