Canadian Investment Managers Lukewarm on the Federal Budget and CPP Reform

Contact:

Jason Clemens, Director of Fiscal Studies
The Fraser Institute, (604) 714-4544, Email: jasonc@fraserinstitute.ca

Release Date: 13 June 2000

VANCOUVER,BC>>>Senior Canadian investment managers surveyed gave the federal budget a failing grade on its spending initiatives and for failing to tackle debt reduction. Better grades were awarded for dealing with the federal surplus, and on tax reduction. The results from The Spring 2000 Survey of Senior Investment Managers, released today by The Fraser Institute, also indicate a high level of dissatisfaction with reforms to the Canada Pension Plan (CPP).

Respondents were asked to assign a letter grade to four different areas of the recent federal budget: taxes, spending, debt reduction, and use of the fiscal surplus.

Debt Reduction and Spending: Failing Grades

Sixty-three percent of survey respondents (responsible for over $196 billion in assets under administration) gave the government a failing grade on its debt reduction plan. In fact, at 48 percent, the debt reduction component of the budget received the highest portion of failing grades "F".

The worst grades were reserved for the government's spending initiatives; seventy-four percent of respondents gave the federal budget a failing grade (41% gave it a "D", while 33% gave it an "F") for the announced spending priorities.

Tax Initiatives and the Surplus: Marginal Grades

The tax cuts announced in the recent federal budget received the highest grades from investment mangers; 63 percent of respondents gave the budget a passing grade for its tax initiatives (30% gave it a "B" grade, and 33% gave it a "C"). The remaining 37 percent gave the budget's tax program a "D".

Fifty-two percent of respondents gave the budget a passing grade for its use of the surplus, but nearly half (48%) graded this area as a "D". Tax cuts and use of the surplus were the only two areas to receive a passing grade.

"It is interesting to note that the investment managers we previously surveyed had warned of serious economic consequences if there was complacency in the federal budget," says Jason Clemens, Director of Fiscal Studies at The Fraser Institute, and coordinator of the survey.

Canada Pension Plan: Effectiveness of the 1997 Reforms

Only 30 of investment managers stated that they agreed or somewhat agreed (none strongly agreed) that the 1997 CPP reform initiative - which included increasing contribution rates by 50 percent, more aggressive investment, and freezing the exemption - would be sufficient to save the Canada Pension Plan over the long term.

A significant 71 percent of respondents stated that they strongly agreed (30%), agreed (26%) or somewhat agreed (15%) that contribution rates, already increased to 9.9 percent from their original level of 3.6 percent, will have to be further increased to ensure the future viability of the CPP.

CPP Investment Board: A Positive Step forward

An overwhelming 78 percent indicated that they agreed (48%) or somewhat agreed (30%) that the CPP Investment Board, charged with investing the reserve funds of the CPP, would achieve its long-term average rate of return of 4 percent.

Interestingly, however, 48 percent of respondents believe that the CPP Investment Board would have a negative (15%) or somewhat negative (33%) influence on the efficiency of Canadian capital markets.

Future Reform

Ninety percent of investment managers surveyed strongly agreed (56%), agreed (30%), or somewhat agreed (4%) that further reforms of both the Canada Pension Plan and the Old Age Security must be undertaken by the federal and provincial governments. None disagreed with further reform, although 11 percent indicated they don't know whether further reform is required.

"There is little agreement regarding the exact nature of reform for the CPP other than complete unanimity on the unsustainability of the status quo," says Clemens, "it is quite clear that everyone surveyed favours some type of privatization."

Minister of Finance Approval Continues to Fall

Following his seventh budget as Minister of Finance, Paul Martin's approval rating has declined to its lowest level since the survey began in 1996. Only 52 percent of respondents gave the Minister a positive rating (15 percent rating it very good and 37 percent rating it good); none rated his performance as excellent.

Mr. Martin's approval ratings have continued to decline since 1997 when he received 100 percent approval ratings, and have now hit their all time low.

The Bank of Canada's approval rating continued its almost uninterrupted upward trajectory since the Winter 1998 Survey, achieving a 100 percent approval rating for the last quarter. The Bank of Canada had not received a perfect rating since the Fall 1997 Survey.

About the Surveya

Surveys were mailed to senior investment officers at 130 investment management firms across Canada. Twenty-seven responses were received between February 7 and March 10, 2000. Statistical confidence levels were not assigned to the results.

"Previous surveys indicated that the federal government had to aggressively reduce the debt and achieve major tax reductions in order to effectively address pressing issues like the brain drain, productivity, living standards, and economic growth. It's clear from this survey that the federal government has largely failed to achieve these objectives," concludes Clemens.

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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