The Conservative Government apparently achieved its long-stated objective of balancing the budget, but its success was as a result of several highly questionable actions. The Government found some of the revenues that it needed by removing $2 billion from the $3 billion contingency fund established as a hedge against unexpected setbacks with our economy and finances. Given the current economic uncertainties, an increase in the contingency fund to $5 or $6 billion would have seemed more appropriate. Another approximately $2 billion in revenues is being raised through the sale of GM stocks that were purchased as part of the shoring up of the auto industry during the fiscal and economic meltdown that began in 2008. Additional revenues are being obtained by keeping the EI (Employment Insurance) rates at a higher level than needed to pay unemployed workers and using the excess funds to help balance the budget.
It seems increasingly evident that the balanced budget was also achieved by a prolonged period of spending restraint that inevitably reduced the standard of service in a number of areas. One highly publicized example has been the growing controversy over the treatment of returning veterans and this has prompted a belated government promise to add more staff to address their needs. The adequacy of the Coast Guard response to the recent relatively small oil spill off the coast of B.C. has raised concerns about the cutbacks in this area as well. It has been difficult, however, to get hard data on the impact of program spending cuts, even with the best efforts of the Parliamentary Budget Office (PBO), an agency established by the Harper Government “to promote truth in budgeting and foster trust in government.”
The federal program spending cuts were needed because the Conservative Government has introduced a series of tax cuts since taking power – beginning with the 2% point cut to the HST and including a large number of “boutique” cuts designed to favour particular segments of the population. Not only are such cuts politically popular but also they support the Conservative strategy of trying to reduce permanently the scope and significance of the federal government, as discussed in an earlier blog (Honey I Shrunk the Budget). This strategy counts on the public dislike for tax increases dissuading a future government from launching significant new initiatives.
The Ontario Budget
Ontario’s first budget since the Liberal Government of Kathleen Wynne was re-elected with a majority was never going to be a balanced one; the key question was whether the province would show sufficient progress in reducing its sizeable deficit. But for the Ontario Government the real challenge was how to reduce the deficit while also increasing government spending in certain areas, notably infrastructure. The latter was an obvious need, especially given the massive congestion in the GTA and the economic stimulus that infrastructure spending would create. But if the government is to spend more while simultaneously reducing the annual deficit, revenues will have to be increased. This would normally be done by increasing taxes and that would seem a reasonable approach given that tax rates in Ontario are not especially high – especially for corporate taxes which are lower than in all but two provinces (Alberta and BC).
But such is the public resistance to, and political fallout from, an increase in taxes that the Ontario budget plan follows a different course. Revenues to fund infrastructure are to be raised by selling 60% of Hydro One – a move that brings to mind (whether fairly or not) the unhappy consequences of the Harris Government sale of Highway 407. The deficit is to be reduced by holding government expenditures below the rate of inflation in certain key sectors, even though Ontario already has the lowest rate of per capital program spending among all provinces. After years of relative peace on the education front, we are already facing teacher strikes at a number of school boards. Complaints about waiting times for surgery or in emergency rooms can be expected to increase as result of the health care spending restraint.
Grading the Budgets
If we evaluate the budgets on the basis of their impact on taxes – a narrow perspective followed by many Canadians – the initial assessment appears positive. The federal budget introduced further tax breaks and still managed to balance in part because of the continued reduction in government program spending. The Ontario budget avoided tax increases and relies upon spending restraint and the sale of assets to increase spending on infrastructure while also whittling away at the deficit.
But the Ontario Government could have increased its capacity to address both of its objectives – deficit reduction and stimulus spending on infrastructure – if it had been willing to introduce some tax increases. The federal government could have taken a leadership role with respect to the Canadian economy by increasing, rather than decreasing, its expenditures and accepting that a deficit budget would be an appropriate response given current economic uncertainties.
Neither of these alternative approaches would be considered “smart politics,” nor would they be popular in the short run. But those same people who don’t want taxes increased also don’t want cuts in education, health care, support for veterans, environmental protection – and a host of other programs that are at risk from expenditure restraint. We are long overdue for an adult conversation about the link between taxes and government services. Until then, we will continue to see budgets that are constrained by the unwillingness of governments to levy the taxes needed to sustain the services that they have committed to provide.