Finance Minister Jim Flaherty released his long-anticipated budget on February 11, 2014, but as expected, it was very lean in terms of new spending. Limited spending measures in the 2014-2015 budget will result in the deficit declining to $2.9 billion by 2014-2015. A surplus of $6.4 billion is expected to materialize in 2015-2016 after taking into account a $3 billion annual adjustment for risk.
These drops in debts and deficits have taken place against a global setting where the Canadian economy has done remarkably well compared to other G7 countries, including the United States. Canada has one of the lowest debt-to-GDP ratios in all of the G7, and it is likely to fall to a low of 27.0% in 2017-2018, putting the government on target to reach 25% by 2021. There is no doubt that running a balanced budget and reducing debt will free up needed resources for more value-added and productive activities such as infrastructure spending and education. At the same time, this year’s budget does a decent job of allocating resources to strategic initiatives that both create growth and reduce unemployment.
Funding the budget
Measures dealing with tobacco and international tax, and measures associated with trusts and estates are expected to generate higher revenues. The budget increases the excise duty on cigarettes by approximately $675M in 2014-2015. Excise duty treatment of tobacco products in duty-free markets also generates revenue. Internationally, government tax treatment of captive insurance and offshore regulated banks will generate sizable revenues. For example, measures dealing with captive insurance businesses will generate a little over $1 billion over four years.
Changes regarding how the government deals with tax on split incomes, as well as on graduated rate taxation on trusts and estates (including non-resident trusts) will also raise revenues. Taxation surrounding estate donations, pension transfer limits, search-and-rescue volunteer tax credits and the adoption expense tax credit will reduce government revenues, but these measures are far smaller than the previous measures designed to increase government revenues.
Labour market improvements targeted
The goal of all governments is to increase gross domestic product (GDP) and employment. However, growth in Canada’s GDP has lagged well below historical averages and unemployment has remained stubbornly high. One of the causes of high unemployment is a mismatch between workers with a particular skill set and employers who require a different skill set. When employers cannot find the workers with the skills they need, jobs go unfilled and this reduces both growth in GDP and employment levels. The government has put significant emphasis on improving the labour market in this budget.
- $222 million a year through transfers to better meet the needs of people with disabilities and their employers, and an additional $15 million over three years to connect people with development disabilities with jobs through the Ready, Willing and Able Initiative
- Creation of the Canada Apprentice Loan by expanding the Canada student loan program
- Investment in youth employment by providing real-life work experience in high-demand fields
- $11.4 million over four years to support the expansion of vocational training programs for people with autism spectrum disorders
- $40 million more for the Canada Acceleration and Incubator Program to help entrepreneurs create new companies
- Money to reform the on-reserve educational system
- $75 million for expanding the targeted initiative for underemployed older workers
- $11.8 million over two years and $3.3 million per year ongoing to launch enhanced job-matching services to ensure that Canadians are given the first chance at available jobs in their local area
- $11 million over two years and $3.5 million per year ongoing to strength the labour market opinion process (which employers must follow before they can hire foreign workers) to ensure Canadians are given the first chance at available jobs
- $14 million over two years and $4.7 million per year ongoing towards the successful implementation of an Expression of Interest economic immigration system
Job growth, innovation and trade
Canada is a small, open economy and depends on international trade to generate growth. The majority of our trade is with the United States, though the government has made it a priority to increase trade with less-traditional trading partners such as the European Union, China and India. This budget attempts to further enhance Canada’s ability to conduct international trade.
The government has introduced no new taxes on small- and medium sized businesses. In order to foster further trade, the government has invested more in infrastructure. For example, a plan to build a new Windsor-Detroit international crossing to improve the flow of goods has been introduced. In addition, the government has invested an additional $1.5 billion for research in areas that create long-term economic advantages for Canada, as well as $500 million over two years to the automotive innovation fund.
The government has introduced several mechanisms to improve the exploitation of natural resources. One of the challenges that Canada faces is getting resource products to market more quickly. The budget provides $28 million over two years to the National Energy Board for comprehensive and timely review of project applications. Other initiatives include investing $90.4 million over four years to continue to support Canada’s Investments in Forest Industry Transformation program.
Families and communities
Transfers to provincial governments and territories have not changed. The budget invests $305 million over five years to extend broadband Internet service for Canadians in rural areas. It also provides new adoption expense tax credits that are expected to cost the government $10 million dollars over the next five years. Search-and-rescue volunteers can also claim tax credits costing the government $2 million over five years. The budget proposes ways to improve the health and safety of aboriginal communities and ways to reduce violence against women. The budget will also tackle “country pricing,” where Canadians are charged a higher price for the same goods sold in other countries such as the United Sates. The competition board will be provided with statutory authority to deal with this issue.
The government seeks to make public service employee compensation more reasonable and affordable by modernizing the government disability and sick leave management system, transitioning to equal cost-sharing for retired employees who chose to participate in the public service health care plan and increasing from two to six years the length of service required to be eligible for the retirement plan.
Jamal Hejazi is Chief Economist at Gowling Lafleur Henderson LLP. He was assisted with this article by student-at-law Ingrid De Freitas.