Feds get an earful on the budget

(February 18, 2005) With the tabling of the federal budget less than a week away, various interest groups are offering suggestions to Ottawa on how to manage the nation’s finances. Depending on who you ask, the feds need to cut taxes, raise benefits and pay off the debt.

According to the Canadian Institute of Chartered Accountants (CICA), the primary focus should be paying down the debt.

“With a minority government facing increased spending pressures and an annual debt service cost approximating $35 billion, the federal government should not forget that the interest meter is still running at a pace of $95 million each day,” said CICA chair David Hope.

The accountants’ group says for every billion dollars in debt the feds can pay off, the government will save $50 million in interest payments per year, assuming an interest rate of 5% per year.

The feds have made some progress on this front, since balancing the budget in1997. In 2004, federal debt service charges consumed 19.2% of government revenues, down from 21.8% in the previous year. The Liberal government has declared a target debt-to-GDP ratio of 25% within 10 years.

“We have seen good progress on paying down the debt, but the total debt still accounts for almost 40% of annual GDP,” said Hope. “The benefits of debt reduction will only be passed on to future generations if these reductions continue, but there remains a long way to go to reach the government’s 25% of GDP target.”

To achieve these targets, CICA says the government has very little latitude for new spending initiatives over the next two years, even if the economy continues to perform at its current level. If there is a setback, spending will need likely need to be tightened.

Others say the time for belt-tightening is already here.

The Fraser Institute is calling for tax-cuts focused on middle and upper-income earners, claiming this would help correct Canada’s “pressing economic problems.” More tax-cuts are recommended in the form of the “complete elimination of the federal capital tax” and lower corporate tax rates.

“The upcoming federal budget must secure present-day economic gains and ensure the future prosperity of all Canadians,” said Jason Clemens, the institute’s director of fiscal studies. “Since 1997, the year Canada finally balanced its books, there have been continued excessive spending increases, a lack of meaningful tax relief, and avoidance of competitiveness and productivity-related issues.”

The think-tank is also calling for tighter controls on new spending, which it says has increased by more than 39% since 1997, pointing out that population growth and inflation over the same period have only been 6.8% and 15.8% respectively.

The Fraser Institute says the federal government has increased health care spending by $58.7 billion since 1997, but says the quality of healthcare has eroded over the same period. It also points out that healthcare is under provincial jurisdiction, suggesting that Ottawa should let the premiers figure out how to finance it themselves.

At the other end of the political spectrum, the Canadian Centre for Policy Alternatives (CCPA) has released its annual Alternative Federal Budget. The group predicts a cumulative three-year federal surplus of about $45 billion and is calling on Ottawa to use the cash to settle funding squabbles between the various levels of government.

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“It’s time to address crumbling federal-provincial-territorial relations and long-neglected social programs,” says Ellen Russell, senior economist with the CCPA. “Investing in the nation’s social infrastructure is long overdue. After sitting on eight consecutive years of surplus budgets, with another $45 billion coming down the pike, any other action by this government would be inexcusable.”

Aside from boosting Canada Social Transfer payments by $13 billion, the CCPA also recommends splitting post-secondary funding from the CST to become a stand-alone transfer program.

The group’s Alternative Federal Budget also calls on Ottawa to “attack poverty” by increasing the Canada Child Tax Benefit, the GST credit, OAS and GIS benefits.

As always, you can turn to Advisor.ca for complete budget coverage featuring financial industry reaction on budget night, Wednesday February 23.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(02/18/05)

Steven Lamb