The Fraser Institute

The Fraser Institute

February 18, 2005 09:00 ET

Upcoming federal budget must focus on competitiveness, productivity and controlling spending

VANCOUVER, Feb. 18 - Next week's federal budget should focus on
policies aimed at improving productivity and economic performance, and
controlling spending, said Jason Clemens and Niels Veldhuis of The Fraser
Institute today in releasing their recommendations for the upcoming budget.
"We should be mindful of the pressing economic problems facing our
country and next week's budget should enact policies that actually deal with
these issues. The upcoming federal budget must secure present-day economic
gains and ensure the future prosperity of all Canadians," said Jason Clemens,
the Institute's director of fiscal studies.

The researchers recommended the following actions in next week's budget:

- Stringent controls on new spending;
- Serious efforts at prioritizing federal spending;
- A multi-year tax relief program that includes:
- Accelerated and complete elimination of the federal capital tax;
- Reductions in the corporate income tax rate;
- Reductions in middle and upper-income personal income taxes through
rate reductions and/or increases in the applicable thresholds; and
- A renewed focus on reforming the way in which services are delivered.

"Since 1997, the year Canada finally balanced its books, there have been
continued excessive spending increases, a lack of meaningful tax relief, and
avoidance of competitiveness and productivity-related issues," noted Clemens.
"The depth of new spending has been truly startling."

Federal Government Spending Since 1997

In 1997/98, the federal government planned to spend $105.8 billion on
programs and services. By 2004/05, the federal government expected program
spending to total $147.9 billion, an increase of $42.1 billion or
39.8 percent. The increase in program spending over the period outstripped
the growth in population (6.8 percent) and inflation (15.8 percent) by a
significant margin. All told, the federal government has introduced new
incremental spending totalling $151.8 billion between 1997 and 2004.
The majority of new spending dollars have been in the area of healthcare.
Specifically, the federal government has increased healthcare spending by some
$58.7 billion (in current dollars) since 1997. Despite this large increase in
federal health spending since 1997, health performance continues to wane:
median total wait times (from GP referral to treatment) have increased
50 percent, access to doctors and technology are still among the worst in
the OECD, and health outcomes compared to other industrialized countries
remain average.
A number of other areas have received sizeable increases in spending
since 1997 including education (a provincial responsibility), defence,
environmental programs, international assistance, and culture.

Some of the current-dollar cumulative increases in spending since 1997:

- $9.3 billion on education-related initiatives;
- $8.7 billion on the Innovation Agenda (includes the Canada Foundation
for Innovation, new research granting agencies, and monies for
universities and research);
- $7.5 billion in additional spending on defence;
- $5.4 billion in additional security spending;
- $4.7 billion for infrastructure spending;
- $3.8 billion for international assistance;
- $3.6 billion for Aboriginal-related spending, including health
programs;
- $3.1 billion in environmental-based program spending including
programs related to Kyoto;
- $3.1 billion in additional cultural spending; and
- $2.3 billion for agricultural supports.

"Except in a few isolated incidents, it is unclear whether or not these
additional monies have actually improved program performance, achieved the
stated goals, or generally made Canadians better off," commented Clemens.
In addition to these areas of spending, the federal government has also
undertaken an initiative (Canada Child Tax Benefit) to provide support to
parents with low-to-moderate income. This activity does not appear as a
spending item but rather as a 'tax expenditure'. This program transfers
income directly to qualifying parents and has cost a total of $14.4 billion
since 1997/98.

Federal Taxes and Revenues

Much has been made about the five-year federal tax relief program that
supposedly provided $100.0 billion in tax reductions to Canadians between 2000
and 2004. Unfortunately, the 5-year tax relief program delivered nowhere near
$100.0 billion in actual tax relief.
For instance, the $100.0 billion includes the elimination of bracket
creep, which permitted personal income taxes to increase based on inflationary
gains. The elimination of bracket creep, while important, does not constitute
a tax cut. Rather, the elimination of bracket creep prevents future
inflationary tax increases. One estimate contained in the 2000 budget
indicated that the elimination of bracket creep represented 42.4 percent of
the total value of personal income tax and capital gains tax reductions.

Increases in Canada Pension Plan Tax Offset Other Tax Cuts

In addition, the $100.0 billion tax cut package ignored the effect of tax
increases. For example, an agreement between the provincial governments that
participate in the CPP and the federal government saw a number of important
reforms implemented in 1997, principal among which was an increase in the CPP
tax from 5.6 percent to 9.9 percent. Between 1997 and 2004, the increased
rates resulted in extra revenues of $29.9 billion.
"While the federal government has been decreasing personal income taxes
and employment insurance premiums, it has simultaneously been increasing the
CPP tax," explained Clemens.
Interestingly, the reductions in the employment insurance premiums
between 1997 and 2004 ($29.0 billion) match almost exactly the increases in
the CPP premiums ($29.9 billion).
"The average worker has seen no benefit from employment insurance
reductions because they were more than offset by CPP premium increases,"
stated Clemens.

Are Canadians Better Off?

It is wise to ask whether the large-scale spending initiatives,
particularly in health, have made Canadians better off.
Health results, at least, indicate that we are not better off. A number
of studies have documented the lack of income growth in Canada. For example,
personal disposable income has increased a mere 9.0 percent between 1997 and
2004, from $18,262 to $19,914.
"While real government spending has been increasing substantially, the
incomes of Canadians have grown much less. It's time to focus on improving
our economy so as to improve the incomes of Canadians," argued Clemens.

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Established in 1974, The Fraser Institute is an independent public policy
organization with offices in Vancouver, Calgary, and Toronto. For further
information, visit www.fraserinstitute.ca.




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