November 2000 Fraser Forum: The Fed’s Mini-Budget:
Small Steps in the Right Direction
On October 18th, Finance Minister Paul Martin unveiled a so-called mini-budget. It contains a host of much-needed changes, particularly with respect to personal income taxes. However, the small steps taken in the mini-budget do not go far enough in reducing taxes. Of equal concern is that the mini-budget fails to prioritize spending, and continues to leave debt reduction to the whim of the government of the day.
Tax relief as expected
Unlike the 2000 Budget, the mini-budget contained no real surprises. The high-income surtax was eliminated. The inclusion rate for capital gains was reduced. The capital gains rollover provisions were enhanced. Each of the three statutory tax rates have been reduced. These are all positive steps for the Canadian economy, many of which have been long supported by The Fraser Institute.
Unfortunately, among the positive proposals on the personal income tax side was one major negative: the introduction of a fourth statutory rate which needlessly complicates an already complicated tax system. In addition, the threshold at which the new top federal statutory rate begins, $100,000, is still significantly lower than the threshold at which our southern neighbours assess their top rate, roughly Cdn $421,000. Maintaining a relatively low upper threshold will do little to stem the flow of some of Canada’s brightest individuals to the US, where they face a much lower tax burden.
Almost no corporate income tax cuts
To further boost the Canadian economy, there should have been an aggressive attack on corporate tax rates to match that on personal taxation. The federal government has not done this, and thus has failed to establish a competitive tax advantage in Canada. Instead, it rather feebly pledges to reduce corporate tax rates over the next 4 years to a level generally competitive with our trading partners—assuming that they don’t reduce their corporate tax rates in the interim. This completely ignores the fact that many of our trading partners have already announced corporate tax rate reductions that will bring their corporate tax burdens below Canada’s.
No legislated commitment to debt reduction
The federal government deserves commendation for allocating much of last year’s unexpected surplus to debt reduction and committing itself to follow a similar policy this year. That said, over the previous three years the federal government has chosen to spend 84 percent of its unexpected surpluses rather than using them to reduce debt or taxes. Nevertheless, the change in focus from spending to debt reduction and tax relief is a positive step that will yield positive economic results.
The lack of a firm, legislated commitment to debt reduction in the future is, however, troublesome. The federal government should continue to allocate a specific amount, on the order of $3 billion of the budget each year, for unforeseen events, the so-called “contingency reserve,” with any unused portion being automatically allocated to debt reduction. In addition—and not contained in the mini-budget—should be a commitment to allocate all unexpected surpluses, whether gained from lower interest costs, higher revenues, or lower expenditures, to debt reduction.
Lack of spending priorities
In announcing new spending initiatives, including $500 million each for climate control and additional innovation funding, the federal government again failed to eliminate unproductive spending, including the $4.1 billion spent in subsidies for Crown corporations. The government could and should have eliminated this type of wasteful expenditure in order to accommodate the announced spending within the current envelope of expenditure. In other words, the federal government could have frozen spending and achieved the new initiatives by eliminating wasteful spending.
Conclusion
The mini-budget (which ceased legislatively to exist with the dissolution of parliament following the election call) moves Canada in the right direction, but too slowly. Greater tax relief, legislated debt reduction, and prioritized spending would move the country further towards economic renewal and prosperity. Nonetheless, Paul Martin’s mini-budget is a step in the right direction; it is just that we need bigger and bolder steps.
Jason Clemens (jasonc@fraserinstitute.ca) is the Director of Fiscal Studies at The Fraser Institute. He has a Masters Degree in Business Administration from the University of Windsor.
Joel Emes (joele@fraserinstitute.ca) is Senior Research Economist at The Fraser Institute. He has an M.A. in Economics from Simon Fraser University.
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