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The federal budget: implications for the Yukon

Yukoners pay close attention to federal budgets, because this fiscal year $774 million of the Yukon government's $965 million in revenue comes from Ottawa in either transfer payments or recoveries. We've had a good few years.

Yukoners pay close attention to federal budgets, because this fiscal year $774 million of the Yukon government’s $965 million in revenue comes from Ottawa in either transfer payments or recoveries.

We’ve had a good few years. Ottawa has been awash in cash, and our federal handouts have grown around seven per cent per year since the financial dust settled after devolution in 2003. That doesn’t sound like much, but it handily outpaced inflation. And on a base of hundreds of millions, seven per cent growth meant that in a typical year Yukon cabinet ministers had an extra $40-50 million of federal cash to look generous with.

So what does Finance Minister Jim Flaherty’s latest budget mean for us? There has been a lot of talk of cuts, retrenchment and fiscal responsibility since Ottawa is expecting a deficit of $54 billion this year. This is a record in nominal terms, although some years in the 1980s and 1990s were bigger as a percentage of our economy at the time.

A quick read of the budget indicates the Yukon got off relatively lightly. Yukon interest groups were muted in their opposition, and some even reacted favourably.

Yes, your employment insurance deductions will be going up significantly, but that’s not until 2011.

Importantly, Flaherty promised not to reduce transfer payments. And he extended the Territorial Health System Sustainability Initiative, which will give the three territories $30 million a year for two more years.

He cut the federal food mail program for isolated northern communities, but that mostly affects the NWT and Nunavut.

And the economic stimulus measures, announced many times previously, were not reduced. In fact, Flaherty’s figures indicate the Yukon will get $140 million in 29 infrastructure projects, more than both the NWT and Nunavut.

And the first cuts announced after the budget hardly affected the Yukon. Minister Stockwell Day announced the elimination of 245 positions on the Monday following the budget, but most were already vacant.

So far, so good.

But there are still some things in the medium term we may need to be worried about.

First of all, Flaherty announced a freeze on departmental operating budgets. His colleague Chuck Strahl pointed out that these had been rising at an unsustainable pace, almost double inflation, for a number of years. While we still don’t know what the next agreement with the public sector unions will cost in terms of raises and increased costs related to generous public sector pensions, it now appears that any salary increases for federal civil servants will have to be matched by job cuts or reductions in other spending.

This will filter through to federal operations in the Yukon, and to contractors and consultants working on projects funded by federal departments.

Also, it is worth parsing Flaherty’s language carefully on transfer payments. He promised not to “cut” them, but made no commitments on their rate of increase. The budget forecasts show transfers to the provinces and territories growing at just four per cent per year. The Yukon may end up getting more than this under our formula, or maybe not. But as the transfer payment growth rate decelerates from what we have enjoyed in recent years, and moves closer to the inflation rate, the Yukon government will have less ready cash to spend here.

Finally, we have to be worried if Flaherty’s projections are wrong. Unlike recent finance ministers, he included no contingency for bad news. And his forecast relies heavily on some economic forecasts that may turn out to have been optimistic. For example, he relies heavily on federal tax and other revenues rising about 40 per cent by 2014/15. If the US economy stumbles, or the global crisis deepens, a large hole will be blown in Flaherty’s projections.

Which may mean that next year’s budget ends up being a lot more exciting than this one, and not in a good way. Especially if you depend on the federal government directly or indirectly for your livelihood, which is nearly everyone reading this newspaper.

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