Budget 2010: Government reins in spending in wake of recession

Canada’s military and the world’s downtrodden were the biggest losers in federal Finance Minister Jim Flaherty’s latest budget, unveiled Thursday in Ottawa. It lays out a plan to return to balanced budgets by the middle of this decade, much of it through reduced growth in spending on defence and international aid.

The plan was largely consistent with Flaherty’s past statements, and relies on expected economic growth. Broadly, he intends to wind down stimulus measures announced in last year’s budget as planned, restrain spending growth in the years ahead, and review government administrative functions in search of additional cost-cutting opportunities. He renewed his pledge to avoid tax increases. “We will have savings of approximately $17.6 billion over five years,” Flaherty told reporters. “That leads us to being very close to balance in 2014-2015.”

Most of the claimed savings come from capping international aid payments. The so-called “international assistance envelope” increases to $5 billion, consistent with the government’s commitment to double it between 2002 and this fiscal year. That spending will subsequently be capped. Whereas the government previously planned to increase it at 8% a year, the international assistance budget “will be assessed alongside all other government priorities on a year-by-year basis,” budget documents asserted. That will save an estimated $1.8 billion a year by 2014-2015.

Those savings may be largely illusory, however. Department of Finance officials explained that the 8% growth was merely a “planning assumption” — none of it had been earmarked for any particular purpose. Most of Canada’s international assistance spending is channeled through the Canadian International Development Agency (CIDA), which among other things provides humanitarian assistance in fragile states and during crisis, such as the recent earthquake in Haiti. That spending also includes payments to international organizations like the United Nations and World Bank.

The government is also slowing growth of the defence budget, which represents one-fifth of total federal direct spending. Now more than $18 billion, it will continue increasing, albeit not as rapidly as previously planned. Expansion will begin to slow in 2012-13, so as not to compromise the mission in Afghanistan. The Department of National Defence said it would consider how to meet the reduced spending targets in the coming months.

Other departments will also suffer. In 2007, the government began conducting strategic reviews of departmental programs, hunting for ill-performing initiatives. The government claims $1 billion in savings resulted, money that was reinvested in other initiatives. Henceforth, such savings will no longer be reinvested. The Prime Minister, ministers, MPs and senators are also to see their salaries frozen between now and 2012-13. Civil servants will get their planned 1.5% raises, but department budgets will be frozen for the next three fiscal years — forcing departments to cut elsewhere. “That’s going to put huge pressure on management, on the minister, on the deputy,” said Glen Hodgson, VP and chief economist of the Conference Board of Canada. He noted that government managers will need greater discretionary powers than they’ve had in the past. “We’re making government more like private industry,” he said.

Extraordinary measures announced in last year’s budget, like infrastructure stimulus spending, are to expire on schedule. (The government has already terminated the popular but expensive Home Renovation Tax Credit, which expired at the end of January.) Winding down such temporary measures will almost halve the deficit by next year, the Department of Finance claims.

For business, the budget’s most noteworthy feature is that it eliminates all remaining tariffs on machinery and equipment, and also inputs imported for further manufacturing. This may promote increased labour productivity among manufacturers, but also increase competition for equipment manufacturers based in Canada. “I think it’s a brilliant idea,” said Hodgson. “If you look around the world, most governments are reluctant to do this.” Flaherty also announced a Red Tape Reduction Commission, to be composed of members from both the private and public sectors, that will seek to reduce the volume of paperwork businesses must complete.

On the revenue front, the government says it’s moving to close certain tax loopholes. The budget proposes new rules dealing with cases where employees surrender their stock options to employers for cash or other benefits — an area where there have been abuses, Flaherty said. The government will also hold public consultations that will examine how certain tax avoidance schemes might be disclosed to the Canada Revenue Agency. The government anticipates that by closing tax loopholes, it will save as much as $625 million a year by 2014-15.

Canada’s fiscal position is, as the government emphasized, the best among its G7 peers. However, efforts to blunt the recession’s trauma have been costly, resulting in an estimated $53.8-billion deficit during 2009-10. Flaherty reiterated that he regarded extraordinary government spending as necessary to combat the recession’s impact, but said now was the time to begin making tough decisions.

“This is a big government, and [we need] to start turning the ship around to ensure that we don’t have a structural deficit,” he said. “Had we not made these decisions now to restrain growth, it would be very difficult to do them one or two years out.”

The Conference Board’s Hodgson thought the plan to reduce the deficits was credible, though he would like to see more of a cushion to absorb unforeseen shocks. Earlier this year, Canada’s Parliamentary Budget Officer, Kevin Page, predicted it would take more than five years to balance the budget.

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