CLC Analysis of the 2012 Federal Budget

Budgets are all about choices. With unemployment and underemployment still at very high levels and a shrinking middle-class, the federal government could and should have laid the basis for a sustained and broadly shared economic recovery.

The federal government should be taking a larger and stronger role in making the economy work for average Canadians, and developing policies that ensure that all Canadians can afford their basic needs in tough times.

Instead, we got a budget that cuts jobs rather than creates jobs; which attacks needed public services and social programs; and undermines rather than enhances retirement security.

As expected, the Budget cuts departmental budgets, by $1.8 billion this year, rising to $3.5 billion next year, and to over $5 billion per year from 2014-15. This is a 6.9% cut to the expenditures subjected to review, at the top end of the 5% to 10% targets which departments were asked to meet. On top of this, there are cuts to the previous path of defence capital spending.

The Budget also announces many very modest new spending initiatives, packaged under the theme of “supporting jobs and growth.” But the cuts far outweigh the new measures — resulting in a net program spending cut of $1.4 billion this year, rising to $3.9 billion next year, to $5.3 billion in 2014-15. By 2014-15, cuts will outweigh new spending by a factor of 7 to 1.

Each $1 billion of cuts to spending represents about 10,000 lost jobs, about evenly divided between direct federal government jobs and private and not-for-profit sector jobs supported by federal government purchases of goods and services. So, the overall negative impact of the Budget on jobs will be about 50,000 when the measures are fully implemented.

The Budget itself reveals that direct federal government employment will fall by 19,200 over the next three years.

The Budget makes only minor changes to taxes and will eliminate the now already small deficit by 2015-16. Total federal government spending on programs in 2015-16 will be 12.9% of GDP compared to 14.1% in 2011-12, a significant reduction, while revenues will be almost unchanged as a share of the economy as economic recovery gradually makes up for cuts to corporate taxes.

The Priority Should Have Been Jobs

Context:

Canada has lost 500,000 well-paying manufacturing jobs since 2003. Wages are stagnant, households now hold record debts of more than 150% of income, and inequality is on the rise. Ottawa has allowed foreign companies like Caterpillar to buy Canadian companies only to shut them down, and the government gave them tax breaks while they were doing it.

The best way for Ottawa to balance the books is to assist in job creation so that working people can make a decent living and pay taxes.

The tepid economic recovery in Canada has ground to a halt since last September. The national unemployment rate is still stuck at almost 7.5%, and is forecast in the budget to average 7.5% this year and 7.2% next year.

The “real” unemployment rate which includes discouraged job seekers and involuntary part-time workers was 10.6% in 2011, and a sky-high 19.7% for young workers, far above where we were at in 2008. Real wages (adjusted for inflation) have been falling.

Meanwhile, our public finances are in good shape. Canada has one of the lowest net public debt levels of the advanced industrial countries (34% of GDP compared to an average of 63%), the federal deficit is now just over 1% of GDP, and government borrowing costs are at an all-time record low.

Job creation is the best way to reduce the deficit and debt. Public investments which create jobs and grow our economy mean more tax revenues and lower spending on programs like Employment Insurance (EI) and social assistance.

New job-creating public investments could have been financed by reversing the corporate income tax cuts which have increased the deficit without increasing real business investment.

The Conservative government has chosen to borrow billions of dollars to spend on tax giveaways to corporations who don’t need the money and who are sitting on the cash rather than investing in creating jobs. Corporations have used their tax cuts to buy up their own shares, to increase dividends, and to increase their cash holdings. Non-financial corporations are now sitting on close to $500 billion of surplus cash.

Restoring the federal corporate income tax rate from 15%, where it stands today, to 20% — below where it was when the Conservatives took office — would have raised about $10 billion in extra revenues per year to invest in the economy.

What We Wanted:

To deal with the continuing jobs crisis, the CLC called for the federal government to launch, in partnership with the provinces and cities, a major, multi-year, public investment program which would create jobs now, promote our environmental goals, and build new “green” industries for the future. A comprehensive plan would have covered: roads, sewers, and basic municipal infrastructure; health and educational facilities; mass transit; passenger rail; affordable housing; energy conservation through building retrofits; and renewable energy.

Federal government support for all infrastructure and environmental investments should have been linked to “Made in Canada” procurement policies so goods and services inputs are purchased in Canada. And infrastructure should have a mandated training component to help deal with looming skills shortages. We also called for sectoral industrial strategies and closely targeted tax measures such as investment tax credits to assist restructuring. Across-the-board cuts to the tax rate mainly benefit already highly profitable financial and resource sector companies.

The federal government should also have made investments in a national, not-for-profit child care and early learning program, home care as part of the public health care system, and long-term care for the elderly. These programs would create new jobs while promoting our social goals.

Even the Department of Finance accepts that these kinds of infrastructure and social investments create five times as many jobs per dollar spent as corporate tax cuts.

What We Got:

The government pretends that this is a job creation budget, but, as noted, new investment measures are far eclipsed by the scale of spending cuts.

Many of the new measures are very minor in relation to the scale of the unemployment problem — for example, spending on the Youth Employment Strategy is boosted by only $50 million for two years, and an older worker program is increased by just $6 million over three years.

Funding is increased for a number of useful research and development initiatives, such as $110 million in increased funding for the National Research Council’s program supporting innovation by small and medium sized businesses, and support for university — business research linkages. $400 million is to be spent to support venture capital pools to support innovative new industries, and the roles of the Export Development Bank and the Business Development Bank are being enhanced to help them fill the current gap for financing innovation. Scientific research and development tax credits will be more closely targeted.

The Budget announces $150 million over two years in small community infrastructure projects, and several investments in federal capital projects such as VIA expansion.

The government reiterates its support for natural resource led growth, and promises faster, single step reviews of major projects.

Corporate Tax Giveaways

The government says that providing tax breaks to corporations is the best way to create jobs, but that is not true. Companies are sitting on almost $500 billion of surplus cash rather than investing, while Conservative corporate tax cuts will cost us $13 billion in lost revenues in the fiscal year 2012–13.

What We Wanted:

We wanted Ottawa to restore the federal corporate tax rate from today’s 15% to 19.5%. This would still be less than the 21% rate when the Conservatives started cutting taxes, and it would still be one of the lowest rates in the G7 group of countries. This move would raise about $10 billion this year in added tax revenue which could be put to good use.

What We Got:

No significant changes were made to business taxes, other than a continued capping of EI premiums, and the one year extension of a new hiring credit for small business intended to defray the cost of increased EI premiums.

Enhance Retirement Security

What We Wanted:

Our public pensions — Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), plus the Canada Pension Plan (CPP) — provide a secure income in retirement, but the maximum value of public pensions falls well short of replacing the 50 to 70% of pre-retirement income needed to maintain living standards. Meanwhile, the private part of our pension system is in deep trouble. Only about one in four workers in the private sector now belongs to an employer pension plan, and others are forced to rely on high cost RRSPs which generate very low and uncertain returns.

Former Assistant Chief Statistician Michael Wolfson calculates that, under current public and private pension arrangements, fully one half of baby boomer middle income earners born between 1945 and 1970 will face an income shortfall of at least 25% after retirement.

One in three seniors already qualifies for the Guaranteed Income Supplement to Old Age Security. Those collecting benefits have incomes below or just above the poverty line. GIS costs are projected to rise from $9.2 billion this year to $24 billion in 2030 due to population ageing and inadequate pensions. Effectively, taxpayers are picking up the cost of inadequate employer pensions.

The CLC continues to call for a doubling of CPP benefits, phased-in on a fully pre-funded basis, and welcome the support given to CPP expansion by seven provinces. The CPP delivers a defined benefit, fully indexed to inflation, and operates at much lower cost than the proposed “pooled registered pension plans” which will generate large fees for the financial sector, and produce a variable and uncertain return.

We also called for an increase in the Guaranteed Income Supplement to eliminate poverty among the elderly.

What We Got:

As expected, the budget announces an increase in the age of eligibility for OAS and GIS from age 65 to 67, phased in between 2023 and 2029. This means that anyone over age 53 today will not be affected, but that persons born after 1962 will have to wait until age 67 to get any OAS benefit.

They argue (without providing any detail on projected savings) that the increased cost of the program in an ageing society is too large. But OAS/GIS program costs as a share of GDP are forecast to increase from 2.36% in 2011, to a still modest peak of 3.14% in 2030, after which year the cost will fall. Taxes are paid on benefits, so the net cost is about 25% less. Experts have said that there is no real affordability issue, and the increase in the retirement age seems mainly intended to force mainly lower income workers to stay in the workforce longer.

There are three key reasons why we should not raise the eligibility age for OAS/GIS.

1. OAS is a basic building block of our retirement system Raising the age of eligibility is the worst possible way to deal with the retirement income security crisis facing Canadians. The CPP and OAS, in combination, replace only around 40% of the pre-retirement income of an average worker (25% from CPP and 13% from OAS). This is one of the lowest income replacement rates from public pension programs in the world of advanced industrial countries. Replacement rates from public pensions are much lower for those with above average earnings.

2. Raising the age of eligibility for OAS/GIS will hit future low income seniors the hardest

Receiving OAS is required to make seniors eligible for the GIS top-up, which provides one in three seniors with a supplement which ensures they have a minimally adequate income in old age.

Raising the retirement age from age 65 to age 67 or higher would impact all future seniors, but would especially impact those who would qualify for the GIS supplement. Many older workers, especially the single, near elderly, already face very high rates of poverty.

The OAS and GIS in combination contribute about one third of the incomes of seniors, and about 70% for those with individual incomes of less than $15,000.

Raising the age of eligibility for OAS/GIS would require future seniors with low incomes — those who would qualify for the GIS — to either save more, work much more hours, or to live in poverty. Saving more is not a realistic option for low income older workers.

Raising the age of eligibility for OAS/GIS from 65 to 67 would result in a very significant increase in poverty for persons aged 65 to 67, unless they were able to find an alternative source of income. That is possible for some, but many older workers in their 60s are in ill health, or are engaged in providing care for others.

Raising the age of eligibility for OAS/GIS would mean that non-working, low income seniors on provincial social assistance and disability programs would have to wait to transition to OAS/GIS, raising social assistance and other costs for provincial governments.

1. Not everyone can work longer

It is argued that eligibility for OAS/GIS discourages older Canadians from remaining in the workforce, and that we need to keep them working to avoid labour shortages. But the reality is that Canadians are already staying in the workforce much longer than was the case even a decade ago. One in four (24%) persons, aged 65 to 70, is already still working, up from 11% in 2000. The rate has been trending sharply upward for a number of reasons. Some — mainly higher income professionals and managers — are working longer because they want to, but many others are working longer due to inadequate retirement savings.

Many older workers are unable to continue working — especially those with an illness or disability, itself often caused by a lifetime of hard work.

The Budget also proposes to allow workers to collect a larger OAS benefit if they postpone taking up the benefit, but — unlike with the CPP — there is no option to take a reduced pension before age 65.

The Budget does not mention the option of expanding the CPP, while reiterating government support for “pooled” retirement plans.

Support Unemployed Workers and Training

Fewer than 40% of the 1.4 million unemployed workers in Canada are receiving Employment Insurance benefits today, a record low. The improved benefits that the CLC fought for during the recession have long since expired. Many unemployed workers have run out of EI benefits and are forced to sell assets and property, or collect welfare to survive. Many workers have been able to find only part-time and temporary jobs which do not provide enough hours to qualify for benefits when they become unemployed.

We wanted the Employment Insurance measures introduced during the recession to be extended and improved, and we want a major push on retraining workers for the jobs of tomorrow.

What We Got:

The Budget extends the current limit on EI premium increases of 5 cents per $100 of earnings until the new EI account is balanced. Rates will then be set to balance the account over seven years. These measures ignore the large surplus in the old EI account which was eliminated before the recession hit.

The Budget announces that it will “strengthen and clarify what is required of (regular EI) claimants” taking into account their individual claims history. Additional dollars have been allocated to enforce these new job search requirements, and the intent appears to also be to direct EI claimants to jobs which would otherwise go to temporary foreign workers. There is no detail re what might be required in terms of distance to travel to these jobs, or the fit between the skills of the worker and those required in the job.

While this is a “stick” measure to force unemployed workers to take low wage jobs, the government also proposes some more positive changes to allow unemployed workers on claim to keep more earnings if they take temporary jobs while on a claim, and also to base EI benefits on the best 14 to 22 weeks of earnings (so that taking a lower wage job does not lower a future EI benefit).

There is some talk of training in the Budget, but no significant new spending to train unemployed workers in the skills needed in growing areas of the economy.

The government flags some pending changes to immigration programs. It signals that it wants to limit employer use of the Temporary Foreign Worker Program, while changing other immigration programs to make them more responsive to immediate employer needs. Entry of skilled trades workers will be expedited, and new applications will be fast-tracked compared to those already in the queue. Few details are provided.

Modest investments in aboriginal primary and secondary education ($275 million over 3 years) and workforce development programs are announced.

The Conservative Spending Cuts

Budget 2012 promises savings from providing more services electronically, more automation, and standardizing administrative functions, where possible. In reality, the cuts will apply to many programs and to grants and contributions, and the details will trickle out only slowly.

Strategic reviews between 2007-08 and 2010-11 had already generated $2.8 billion in ongoing reductions. In 2011-12, the government announced a review of $75 billion in departmental spending and has now said that it will reduce spending by 6.9% of this base ($5.2 billion once fully implemented).

Departments and central agencies experiencing reductions of 10% or more of the review base include Transport, Treasury Board, the Public Service Commission, Natural Resources Canada, Finance, Shared Services Canada and Agriculture and Agri-Food Canada.

Canadian Heritage will eliminate the Katimavik program outright, and spending on the Canadian Broadcasting Corporation will fall by $28 million in 2012-13, rising to $70 million in 2013-14 and $115 million by 2014-15.

Environment Canada will eliminate the National Round Table on the Environment and the Economy.

Cuts to the international assistance envelope at CIDA will be $153 million in 2012-13, rising to $192 million the following year and $319 million in 2014-15.

HRSDC will create a single Social Security Tribunal to consolidate existing administrative tribunal system for major social security programs.

The federal government’s plan to return to balance has rejected measures to raise revenue and relies, instead, on limiting program spending growth to 2.2% per year and achieving savings through expenditure reductions and administrative savings targeted in the 2011 Strategic and Operating Review. Budget 2012 projects a minor deficit ($1.3 billion) in 2014-15, essentially returning the government to balance two years from now on the basis of program spending cuts. Given that growth is expected to remain modest and unemployment rates are projected to remain high over this period, Budget 2012 can scarcely be described as a “jobs and growth budget.”

Andrew Jackson is Chief Economist with the Canadian Labour Congress and a CCPA Research Associate.