Fraser Institute's Federal Budget Backgrounder
Contact:
Joel Emes, Research Economist
The Fraser Institute, (604) 714-4546, Email: joele@fraserinstitute.caMichael Walker, Executive Director
The Fraser Institute, (604) 714-4545 Email: michaelw@fraserinstitute.caRelease Date: 14 February 1997
VANCOUVER, BC>>> Much of the pre-budget discussion has been about by how much Finance Minister Paul Martin will exceed his deficit reduction targets, and how the savings on debt service costs should be spent.
But Canadians need to keep in mind three important points. First, as long as we have a deficit, there is no extra money to spend. Second, Canadians currently work until mid-year (25 June) to pay for all levels of government. And finally, now is not the time for complacency about the size of our debt.
This raises a few questions when assessing the federal government's 1997/98 budget:
Is federal fiscal performance improving?
Yes. The Finance Minister will likely exceed his own modest targets of two years ago. He will use the budget speech to show by how much. The fiscal progress, despite the politics, is real.
In the Fraser Institute's Budget Performance Index for 1995, the federal government ranked last, with very poor performance in the spending, revenue, and debt and deficit sections of the index. The federal government moved up to 9th from 11th place in the 1996 Budget Performance Index, with middle-of-the- road achievement in some of the key variables in the index -- "percent change in own real spending" and "change in own-source revenue as a percent of GDP" (see attached tables). Holding them back from a higher rank were "change in taxes per person" and "deficit per person."
While most of the federal government's improvement on the Budget Performance Index is due to its higher ranking on the spending portion of the index, cuts in transfers to the provinces are linked directly to this improvement, leaving room for improvement in cuts to federal spending, and considerable room for improvement on the revenue and debt and deficit fronts.
How is Paul Martin saving money?
The 1996/97 budget indicates program spending reductions of $4.8 billion. Over $1 billion, or 25%, is from federal spending cuts to subsidies, Crown Corporations, and Defense, offset by spending increases in employment insurance and elderly benefits. Another $3.6 billion, or 75%, is from cuts to transfer payments -- the bulk of which consists of the Canada Health and Social Transfer (CHST).
Federal cash transfers for provincial programs under the old "Established Program Financing" and "Canada Assistance Plan" worked out to $619 per person in 1995/96. In 1996/97 under the CHST, transfers work out to $492 per person, a drop of more than 20 percent.
What Ottawa does in the 1997/98 Budget in terms of per person funding of health, post-secondary education, and welfare is important because of its existing and contemplated legislative control over what services should be delivered publicly and how. The provinces have cause to complain if the federal government imposes penalties under the Canada Health Act at the same time its share of health funding is dropping.
How much of the new Child Tax credit to low-income Canadian families will Paul Martin take back through federal income tax "bracket creep"?
It appears certain that Mr. Martin will announce a substantial increase in the Child Tax Credit benefits for low-income working families. Estimates of the "new" money Ottawa intends to put towards enriching this benefit range from $310 million to $600 million. (Last year's budget announced that approximately $190 million would go to the Child Tax Credit in this year's budget: "new" money would be funding above that level.)
At the same time, Mr. Martin has refused to fully index the income tax brackets to inflation. (The brackets only change when inflation exceeds three percent, the top of the Bank of Canada's inflation target.) Even the low inflation of the last five years has pushed many families into a higher tax bracket. The net effect is that they are paying more tax even though real incomes have remained relatively constant.
Our calculations show that between 1996 and 1997 "bracket creep" accounted for an additional $109 million in taxes, paid by individuals with annual incomes of $30,000 or less. This is after accounting for employment and wage growth. During the same period, individuals with annual incomes of $50,000 or less paid $290 million more in taxes than they would have had Canada's tax brackets been fully indexed to inflation.
The hidden tax increase of "bracket creep" could take from low-income families a substantial portion of the money transferred to them by the enhanced Child Tax Credit. An additional hardship for low-income families who split up will be the proposed Divorce Act amendments, which will raise $300 million in new taxes from non-custodial parents. What is the point of a richer Child Tax benefit if Ottawa grabs back much of the money through hidden tax increases?
What about the debt?
While Mr. Martin deserves credit for having exceeded his deficit targets, the accumulated debt leaves Canada in a financial predicament, as bond raters have recently pointed out. The net direct debt of the federal government was $578.4 billion at the end of the 1995/96 fiscal year. This is the number that is usually referred to as "the debt". However, this number does not include the federal government's indirect debt of $41.8 billion, and CPP and OAS obligations of $1.12 trillion. The total of these debts and obligations is over $1.74 trillion.
Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver.
For further information contact:
Suzanne Walters, Director of Communications,
The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca
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