Does the 2005 federal budget pass the credibility test?

Author(s): 
February 23, 2005

The 2005 federal budget was an important credibility test
for Paul Martin's government. While Martin has been actively involved in
shaping the budget for more than a decade, this was his first budget as an
elected Prime Minister. The promises of the last election campaign are still
fresh in public memory, and Martin has said he is committed to restoring trust
in government. Delivering on those election promises would be a good place to start.

With deals for health care and equalization already
announced, the budget contains some first steps towards a child care program, a
new deal for cities, and an action plan for Kyoto. But dollar amounts in the
budget are disappointingly small in 2005/06, with funding creeping up over five
years.

Instead of using large projected surpluses to make more
meaningful investments, the Liberals chose to buy the support of the
Conservatives with some lavish tax cuts. The biggest surprise was the tabling
of corporate income tax cuts that will cost $2.5 billion when fully phased in.

There are other measures that will be greeted favourably in
the Shaughnesseys and Forest Hills of Canada. The RRSP contribution limit will
be gradually raised to $22,000, and foreign content limits — that keep
investment capital in Canada in exchange for the tax shelter — have been
eliminated completely. These measures primarily benefit people with very high
incomes.

In addition, raising the basic personal exemption for income
tax will cost $3.6 billion when fully phased in. Low income people will see
little benefit from this move, and overall would have been better off with
targeted tax measures, like an increase in the Child Tax Benefit, or stronger
support for social programs.

Strangely, there is little new money in the budget for
2005/06. Most of the proposed changes, whether new tax cuts and spending
increases, come into effect near the end of a five-year planning framework.

For Martin, this strategy means hanging on to the Prime
Minister"s chair by averting another election. Conservative leader Stephen
Harper remarked to the media that he saw no reason to vote it down.

This is a case of political expediency trumping the
priorities of Canadians. The federal government is sitting on all of the money
it needs to deliver on its election promises. But by continuing the trend of
low-balling revenues and adding generous cushions to budget targets, the budget
process is tilted towards debt repayment. This game-playing undermines public
debate and confidence.

This budget also marks a ten-year anniversary. In 1995, Paul
Martin, the Finance Minister, delivered a landmark budget that reshaped social
policy in Canada. Transfers to the provinces were lumped into one bulk transfer
then cut back. A casualty of this exercise was the Canada Assistance Plan, a
framework that ensured minimum standards be met by the provinces for social
services in exchange for federal cash.

With the 1995 budget, the feds essentially offloaded their
fiscal problems onto the provinces, who have the responsibility for health
care, education and social services. In every province, social services, in
particular, got the short end of the stick.

The federal budget turned to surplus in 1997/98 and has
remained solidly in the black since. In recent years, the feds have been slowly
restoring funding to the provinces, with a series of deals on health care, and
a new equalization agreement last fall. The 2005 budget is another timid step
in that direction.

This means that federal program spending relative to GDP
will be just under 12% in 2005/06, up from 11% in 2000/01, but well below the
16% level when the Liberals were first elected in 1993. Beyond the numbers, the
real cost of budget cutbacks has been growing social and infrastructure
deficits.

Tax cuts were an option for Canadians in the 2004 election,
but a strong majority rejected tax cuts in favour of renewed social investment.
The government may pass the 2005 budget, but, sadly, they fail the credibility
test.

Marc Lee is an economist in the BC office of the Canadian
Centre for Policy Alternatives.

Offices: