January 2002
Budget 2001: Security a Smoke Screen for Higher Spending
by Jason Clemens & Joel Emes
In its first budget in nearly 2 years, Canada's federal government announced large spending increases, moderate tax increases, and no debt repayment, resulting in a missed opportunity to adequately fund needed security and defence programs and to place Canada on a path towards greater prosperity.
Here are some highlights and analysis of last month's budget.
Spending increases
Overall program spending was projected to increase to $130.5 billion this year (2001/02) from $119.3 billion last year, an increase of 9.4 percent. It is further expected to increase to $136.6 billion in 2002/03, and to $140.2 billion in 2003/04. These increases represent year-over-year percentage increases of 4.7 percent and 2.6 percent, respectively, but do not include additional spending that the government has committed to, but has not yet included in budget estimates. Even excluding these additional expenditures, government spending is projected to outpace economic growth next year by a factor of 4.1
The federal government announced that spending in the current year, 2001/02, would be $5.9 billion higher than originally announced in the October 2000 mini-budget. The government further detailed spending increases amounting to nearly $7.0 billion for next year, 2002/03, which does not include the 2002/03 share of an additional $2.5 billion which will likely be spent creating the Strategic Infrastructure Fund and sending aid to Africa.
Moderate increases for security and defence
The spending increases were sold to taxpayers as necessary additional security and defence expenditures. Given the events of September 11th, most Canadians would agree that additional spending on security and defence is warranted. However, very little of the increases in spending are, in fact, earmarked for defence or security.
Overall "security" spending, which includes everything from defence, to CSIS, to airport security, to immigration, to the RCMP, will increase by $1.14 billion this year (2001/02) and $1.52 billion next year. This represents 18.6 percent and 15.8 percent of the total budgeted increase in spending for 2001/02 and 2002/03, respectively. Put differently, less than one in five dollars of new spending this year and next are dedicated to security and defence- related programs.
Another measure of the Budget's neglect of security and defence issues is the relatively small allocation it made for current defence endeavours. The Budget increased funding for military operations by $400 million for the current year (6.8 percent of new spending) and $110 million for next year (1.2 percent of new spending) with no additional allocation for the years 2003/04 to 2006/07. In other words, over the next 5 budget years, Canada's military will receive an additional $510 million to support current operations, excluding money set aside for operations in Afghanistan.
To add some perspective to these increases, it would require an additional $13.6 billion in security and defence- related spending in the current year alone just to bring the proportion of Canada's GDP spent in these areas up to the NATO (European countries only) average of 2.1 percent of GDP. The increase needed would be even greater if the United States' spending on defence and security were included in the calculation.
Pet projects dominate spending increases
If spending increases announced by the federal government in last month's budget weren't used for security and defence purposes, what were they used for? Unfortunately, the answer is a long list of pork-barrel, politically-motivated projects which more often than not can be characterized as wasteful spending. Here is just a snapshot of some of the projects that received financing in last month's budget.
- Research & Technology Initiatives (funding for 2000/01-2002/03):
- Canada Foundation for Innovation: $960 million
- Genome Canada: $67 million
- Medical, Natural Sciences & Engineering, Social Sciences & Humanities, and the Canada Research Councils: $1.5 billion
- Canadian Space Agency: $639 million
- Government On-line: $280 million
- Technology Partnerships Canada: $570 million
- Connectedness (includes SchoolNet, Community Access, Smart Communities, and Geo Connections): $189 million
- Strategic Investments (funding for 2001/02 - 2003/04)2:
- affordable housing: $255 million
- Strategic Infrastructure Foundation: $2 billion3
- critical government capital: $236 million
- Green Municipal Investment and Enabling Funds: $125 million
- additional international assistance including the Africa Fund: $1 billion
In addition to the initiatives listed above, a number of programs were approved before last month's budget. Among those projects receiving multi-year funding4 were:
- tobacco reduction strategy: $590 million
- cultural initiatives: $562 million
- CBC: $120 million
- Canadian Television and Cable Production Fund: $200 million
- shipbuilding: $150 million
- development of the Toronto waterfront: $502 million
Last month's budget, coupled with those announcements made since the mini-budget tabled in October 2000, have resulted in a burgeoning litany of new programs and increased spending on existing programs. The government has made no attempt to eliminate or even curtail redundant spending in other areas, such as business subsidies and economic development schemes, to finance these new programs and additional spending. Further, it appears as if the government has almost totally ignored, once again, the serious questions raised by the Auditor General in regards to the provision of current programs.
Tax increases, not tax cuts
On the other side of the ledger, the government expects overall revenues to be down $7.3 billion to $171.3 billion in the current year, due both to a slowing economy and previously-announced tax cuts. However, the Budget indicates that revenues will increase in both subsequent years, and will fully recover from the tax cuts announced in 2000 by 2003/04. However, an indication of the need for greater tax relief is the fact that budget revenues have increased from 15.9 percent of GDP in 1993/94 to 16.9 percent of GDP in 2000/01. Even with the announced tax cuts, government revenues are only expected to decline to 15.5 percent of GDP in 2003/04, a mere 0.4 percentage points less than when the Liberals first took office.
Apparently ignoring this lack of real tax relief, the Budget actually included moderate tax increases. Over the next 5 years, the federal government expects to collect $2.5 billion in additional tobacco taxes and $2.2 billion in user fees from air travellers. In addition, previously announced increases to the Canada Pension Plan premiums will also take effect, rising from 8.6 percent this year to 9.4 percent next year, and ultimately to 9.9 percent in 2003. The tax increase that arises from the CPP premium increases is approximately $2.4 billion next year alone.
Fiscal prudence and debt reduction
In previous years, the federal government has included two cushions to accommodate any forecasting errors or economic turbulence: the contingency fund and economic prudence line items. This Budget has seen the complete elimination of the second account, economic prudence, and a decrease in the value of the contingency reserve. These two moves will place the fiscal balance of the government in greater jeopardy, since less of a cushion has been included for extraordinary events.
In addition, the federal government has altered its policy with respect to the disposition of any unused funds remaining in the contingency fund. Previously, the federal government has used any leftovers as payments against the national debt. Budget 2001 witnessed a major change in this policy as the federal government will now use any remaining funds from the contingency reserve to finance current program spending, a complete reversal of previous commitments. Therefore, the nominal value of the national debt will remain constant and the only decline in the national debt as a percentage of the economy (GDP) will occur as a result of economic growth.
Conclusion
Budget 2001 is a throwback to a previous era. It presents large spending increases, tax increases, and no debt reduction.
This Budget is a missed opportunity. The government could have accommodated the new spending on security in it while still allowing for tax relief in the amount of $4.8 billion in 2000/01 and $5.5 billion in 2002/03 without cutting any existing programs. The re-prioritization of program spending, specifically the elimination of spending on business subsidies, transfers to Crown corporations, and spending on regional and industrial development programs, could have allowed for the financing of these new programs and even greater tax relief.
The government could have set defence and security spending on a rational and reasonable course to help protect Canadians from aggression, both foreign and domestic. It could have prioritized government programs, focusing on those things we actually need the government involved in, such as security and defence, while eliminating programs in areas where not only do we not need government involved, but where such involvement actually hinders productivity. Specifically, the government should have used the surpluses in both the current fiscal year and next to finance needed security spending and tax reductions. Instead, the government returned to the familiar pattern of spendthrift behaviour. Let us hope that the next budget, optimistically to be tabled early in the new year, will rectify many of last month's budget deficiencies and put Canada on a real course of security, safety, and economic prosperity.
Notes
1 The estimate for Canadian economic growth for 2002 in the 2001 budget is 1.1 percent.
2 Note different funding horizon than the previous set of initiatives.
3 Note different funding horizon than the previous set of initiatives.
4 Funding period again differs from previous lists; funding is for 2001/02 to 2006/07.
Jason Clemens (jasonc@fraserinstitute.ca) is the Director of Non-Profit 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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