A tale of two budgets

'It was the best of budgets. It was the worst of budgets." If Charles Dickens had been an economist, that is how he would have described federal Finance Minister Jim Flaherty's budget last week.

‘It was the best of budgets. It was the worst of budgets.” If Charles Dickens had been an economist, that is how he would have described federal Finance Minister Jim Flaherty’s budget last week.

Flaherty attempted to wax Churchillian on how crucial this budget was for the future of our wonderful country. “We see Canada for what it is and what it can be – a great, good nation, on top of the world, the True North strong and free.” In case you didn’t get the point, the budget had a grand-sounding title in huge letters on its cover: Jobs, Growth and Long-term Prosperity.

On the other hand, listening to opponents of the budget, you could almost think the country’s most precious government programs were about to be attacked by a crazed band of axe-wielding Vikings.

Reality, sadly for those who pass as rhetoricians in Canada, is much more dull.

The Conservative claim that the budget lays the groundwork for future wonderfulness is wildly overblown. They have about $1.1 billion in new money for a grab bag of relatively minor initiatives, including innovation tax credits, skills training and infrastructure. It’s hard to say that $1.1 billion makes much difference in a $1.8-trillion Canadian economy, and the evidence is mixed – to say the least – that things like tax credits really drive fundamental changes in innovation and productivity.

Furthermore, many of the productivity-enhancing policies economists have been talking about for years remain off the table. These include reducing business subsidies and more competition and foreign investment in fields like transport, telecom and agriculture.

As for the “budget as slash and burn” line of argument, it is worth noting that the cuts to be phased in over several years amount to $5 billion. That’s a sizable number and many federal workers will be hit hard. But the total federal budget is $276 billion. Even in the day-to-day operating budgets of departments, where the cuts are focused, the cuts are mostly in the five to 10 per cent range.

According to federal analysis, the cuts are half to a third as big, relative to the economy, as the current austerity programs in the U.K., Spain and Germany.

Plus, we are coming off a high-spending stimulus program. Even after the cuts, Canada will still have more federal workers than five years ago.

For all the opposition’s attempts to paint the Finance minister as a modern, less stylish version of Marie Antoinette, this is hardly a “let them eat innovation tax credits” moment.

There are some modestly useful things in the budget. Making my former Foreign Service colleagues have longer postings in smaller apartments will save some money, as will selling a few over-sized ambassadorial mansions.

Abolishing the penny is a good idea, although years overdue. Judging by how City of Whitehorse parking meters don’t even acknowledge the nickels you put in them, the five-cent coin is likely next.

Merging the computer departments of 43 ministries into a single organization also makes a lot of sense. Most large companies did this years ago, as did the Australian federal government.

On the other hand, one of the “improvements” the budget proposes for the Employment Insurance program is higher rates for workers and employers. Politicians always say this is a “fee” and not a “tax increase,” but don’t worry, you’ll be paying more cash to Ottawa anyway.

Some of the most contentious things in the budget aren’t even, strictly speaking, budget matters. An example is streamlining the review process for large natural resource projects. The review for the Mackenzie pipeline took longer than World War Two, which is much too long. But the devil will be in the details and we will have to watch if the feds can indeed achieve rigorous reviews in tighter time frames.

The Yukon receives little attention in the budget. Our first mention is on page 109, where the government promises to change customs rules so that Canadians on Alaskan cruises can rent cars in Skagway and drive to the Yukon without being charged big taxes at the border. I didn’t even know we had that problem, so it’s good to hear the government is on top of it. Also, the territorial credit limit is being raised to $400 million.

Likely the biggest long-term impact of this budget will be on our retirement. The government is keenly aware that there were seven workers per retiree in the 1970s, but only four today and just two in 30 years. So the Old Age Security age is being raised from 65 to 67 starting in 2023.

The government also promises to move towards requiring federal workers to pay 50 per cent of their pension costs. This sounds fair, but federal workers won’t be happy once they see the numbers and “improvements” in benefits. This is a topic we will be hearing more about, since gloomier growth scenarios have reminded governments how costly their long-term pension obligations are.

Back when German chancellor Bismarck introduced the first major pension program, he set the retirement age at 70 knowing that the average Prussian peasant died at age 45. Now the Drummond Report notes that the average teacher in Ontario works 26 years, retires at age 59 and collects benefits for 30 years.

If this budget is remembered for anything, it is that it fired one of the first shots in the battle over pensions.

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels.