Budget 2018: The Clean Up, Set Up and #TimesUp Budget

Federal Finance Minister Bill Morneau has presented his third budget, the next to last before the 2019 election. First, the budget cleans up several hanging issues from previous budgets and government actions, which are summarized below.

Second, the budget sets up several important themes for the Liberal re-election plan, clearly the first stage of a two-part strategy.

Lastly, the budget’s title, “Equality and Growth,” defines what the Liberal government is trying to do: say #TimesUp and signal an intention of fairness for workers and employers, men and women, and Canadians of all backgrounds.

Given Morneau’s challenges since summer 2017 over tax-related issues, this budget was also an opportunity for him to prove his political skills. The result is a document where first day news hooks for the opposition are limited. While the Conservatives have continued to criticize the delay in seeking balance, the Liberals have bet that most Canadians are in no hurry to eliminate the deficit.

The NDP have criticized the edges, but the move to establish a national pharmacare plan steals their largest plank for the 2019 election. In fact, this budget is remarkably routine in its approach, focusing on delivery, popular small initiatives and political firefighting, rather than riskier moves or opening-up thorny problems.

Clean Up

Private Corporations

On the clean up side, last year’s debate around the treatment of the taxation of private corporations forced a partial retreat. In the face of criticism, the government lowered taxes on small businesses from 10.5 to 9 percent by 2019, but left open the possibility of further changes to the system to ensure that tax advantages are not provided to a small number of wealthy individuals.

The government announced its action today: going forward, there will be a $50,000 threshold on passive income in a year (equivalent to $1 million in savings) while protecting those who have already sheltered income. Also, it will gradually reduce access to the small business tax rate for those with significant passive investment income. In addition to closing a loophole where financial institutions were creating artificial losses for write downs, these changes net about $1 billion in new revenue on an ongoing basis.

Reconciliation

The Trudeau government promised to drive reconciliation with Indigenous peoples. However, that project hit significant challenges over the past two years, from delays in the Inquiry into Missing and Murdered Indigenous Women to improving drinking water on reserves. The budget attempts to improve that process, starting with an additional $5 billion investment over five years. The budget includes:

• $1.4 billion over six years to First Nations Child and Family Services;
• $1.8 billion over five years to support water and wastewater in First Nations communities;
• $2 billion over five years to create a new Indigenous Skills and Employment Training Program;
• $1.5 billion in new funding for separate programs for Inuit, Metis and First Nations housing;
• Empowering First Nations that choose to use the First Nations Land Management Act, and opt out of the Indian Act, allowing First Nations to create their own laws related to land management, matrimonial real property, and legal protection from family violence; and
• $127 million over two years for First Nations to build internal fiscal and administrative capacity.

Resources and Climate

Previously, the Trudeau Liberals sought to balance the tension between resource extraction and environmentalist pressures within the country. The pipeline and climate announcements were an attempt to present a middle course. In private conversations, Trudeau Liberals admit their belief that the approach has not worked, with pipeline advocates discounting their efforts and environmentalists penalizing their actions.

That belief may have sparked a subtle shifted this year, with several pages devoted to climate change, clean energy, species recovery and parks, and no new programing or support for oil and gas extraction. While the Liberals are continuing to fight to get current oil production to tidewater, the balanced approach between resource extraction and environmentalism may skew toward the latter.

This is consistent with their focus on increasing seats in the lower mainland of British Columbia, a strategy road tested with the White Rock by-election.

Innovation and Research

The Liberals are investing heavily in basic research, with $1.7 billion over five years going to granting councils and researchers, including lab and equipment upgrades. The government is also continuing to clean up innovation funding across government, with a two-thirds reduction in the number of programs. Instead, programs will be focused on these four platforms:

1. Industrial Research Assistance Program;
2. Strategic Innovation Fund;
3. Canadian Trade Commissioner Service; and
4. Regional development agencies.

This process is expected to continue with further consolidations next year.

Set Up

Increased Fiscal Flexibility

The strength of the economy is allowing the government to exceed its fiscal projections. For instance, the $28.5 billion deficit of 2017-18 in last year’s budget is now projected to be $19.4 billion. While the government is continuing to project significant deficits into 2022-23, this is likely to maintain flexibility, rather than a straight calculation based on current revenues and expenditures. The option for a quick return to balance is present, but the government appears to be choosing a slow path to maintain room to finance major spending in 2019-20, before the next election. Given the challenge of President Trump, it also presents significant cushion should they be forced instead to react to lower U.S. corporate rates or a NAFTA related shock.

Canada Workers Benefit

On the heels of the Canada Child Benefit consolidating tax benefits for families and focusing them on those with more modest incomes, the Trudeau Liberals are also moving on the Canada Workers Benefit. The existing tax credit leaves more money in the pockets of low income workers. This reform expands access to the credit, increasing the maximum benefit and increasing the income level at which the benefit is phased out completely.

The Trudeau Liberals have staked significant credibility on tangibly improving the lives of the “middle class and those working hard to join it.” This serves dual duty of combating moves toward conservative or social democratic populism at the polls, and providing a potent pocketbook benefit to the bulk of Canadians.

Pharmacare

The budget announced an Advisory Council on the Implementation of National Pharmacare, to be chaired by Dr. Eric Hoskins, who stepped down as Ontario’s Health Minister yesterday. This is likely stage management for the announcement of National Pharmacare in next year’s pre-election budget. Hoskins panel will keep the pharmacare issue in the public eye over the next year, pre-selling the benefits before the program is announced and while the granular details are worked out.

National Pharmacare is not without cost. In 2016, the Parliamentary Budget Officer (PBO) estimated the cost to the federal treasury of implementing a national pharmacare program at $19.3 billion, based on Quebec’s formulary and rules. It will likely require significant wrangling with the provinces to give up the federal transfers that finance more than $10 billion for their drug purchasing, which would bring the federal government halfway to financing the plan.

Journalism and Elections

With an eye to the election next year, and the events of 2016 in the United States, the government is taking action to strengthen local journalism and uphold electoral integrity. The loss of community newspapers in a number of cities prompted a fund of $50 million over five years to independent non-governmental organizations for support to local journalism in underserved communities. The organizations will have full responsibility to administer the funds at arm’s length from government to respect independence of the press.

The government is also investing in a process to ensure changes in the way Leaders’ Debates in the election are negotiated and organized. Additional money is being provided to Elections Canada to ensure the integrity of Canadian elections. Separate from the sections on election security, they are also providing $500 million over five years and $108 million in perpetuity for a National Cyber Security Strategy.

#TimesUp

Gender Wage Gap

This is the first budget drafted using gender-based analytical tools, there are significant moves on addressing the gender wage gap. These include:

• Proactive pay equity legislation for federally regulated workplaces;
• New EI Parental Sharing Benefit, “use it or lose it” benefits for the second parent; and
• Changing the Standing Orders in Parliament to allow MPs and Senators to take maternity and parental leaves.

These moves will be particularly welcome in Quebec, where a similar “use it or lose it” benefit program is widely utilized.

Canada Summer Jobs Program

The budget provides an additional $448.5 million over five years for the Canada Summer Jobs programs. This is on the heels of a debate over a revised policy for the program that required the signatory organization to affirm it would uphold support for reproductive rights and avoid discrimination of any type. This provoked criticism from some pro-life and other religious groups. The Liberals clearly feel they can double down on the issue going into the next election.

Women in the World

The budget provides $1.5 billion over five years to the Feminist International Assistance Policy, and a commitment to increase transparency in international assistance. The government also commits to increase the number of vulnerable refugee women and girls to be resettled in Canada.

Sexual Assault

The government commits $5 million over five years towards developing a national framework to address gender-based violence at post-secondary institutions across the country. The budget goes on to make a remarkable statement. “Starting in 2019, for those universities and college campuses that are not implementing best practices addressing sexual assaults on campus, the Government of Canada will consider withdrawing federal funding.” This is a very big stick to ensure campuses are doing everything they can to combat sexual assault.

Opposition Reaction

Conservatives

Conservative Leader Andrew Scheer focused his criticism on the government’s failure to return the budget to balance, citing the Prime Minister’s promise to run three “modest” deficits of $10 billion and instead tabling a budget with a $19 billion deficit.  In Scheer’s words, “Never has a Prime Minister spent so much to achieve so little. Despite last year’s economic good fortune, Justin Trudeau has failed once again to deliver the results that matter to Canadians.” He promised that a Conservative government would return the budget to balance.  Scheer also noted that the budget did not include any contingency plans if the NAFTA renegotiations failed, and if the agreement was scrapped.

The Conservatives have also criticized the government for failing to take-action to counter the corporate tax cut passed in the United States by the Trump Administration, which they believe may jeopardize future investment and job creation in Canada.  They also noted that the budget did nothing to address the challenges faced in Canada’s agricultural or natural resource extraction sectors.

New Democrats

With the political winds pushing left-ward in recent years, New Democrats have expected this budget, and very likely the next, to come crashing upon their shoals. In response, Jagmeet Singh and his MPs will deploy a tactical mix of taking credit for budget measures they have been pressing the government for, while criticizing absent or slow-drip announceables.

Improved action on reconciliation and Indigenous child welfare, abandoning the disastrous Phoenix pay system, and even the more politically-motivated pharmacare study, can fall into the basket of credit-taking. Where it can legitimately level criticism, the party can point to absent measures to protect private pensions in the wake of the Sears bankruptcy, as well as the government’s decision to run a high-profile study of pharmacare as a gesture motivated by pre-2019 politics rather than a plan to deliver lower drug costs; an exercise of “kicking the can own the road,” as health critic Don Davies put it yesterday. Indeed, Singh’s response on Twitter was to point to the budget’s failing to meet the expectations of New Democrats saying, “We proposed sensible measures to make the economy work for everyone, including closing tax loopholes for the super-rich and making investments like housing and pharmacare to make people’s lives easier, but the government refused to act.”

On the budget’s general fiscal positioning, the Liberals can expect little criticism from the Singh-led party, who will be critical of any early signals of austerity while needs in health care, income inequality, and affordable housing go unmet.