Budget 2014: The march towards Budget 2015 and the next federal election campaign

To use an Olympic analogy, today’s budget was the qualifying round for Budget 2015.  It was a “business as usual” budget where the government sought to show progress on some key files while demonstrating overall fiscal restraint and paving the way to a budget surplus in 2015.  It is important to remember that many of the campaign promises announced during the 2011 federal election were tied to a balanced budget. It has taken longer than Finance Minister, Jim Flaherty would have liked to achieve fiscal balance but the government can now illustrate there is a clear path to budget surplus.

Today’s budget narrative is consistent with the same message track the Conservatives have used since its first response to the financial crisis of 2008: “the global economy remains fragile and there’s only one stable and safe party that can guide you through the uncertain times ahead.”  We can expect the Prime Minister to stay on this message relentlessly while painting the opposition parties as “untested” and “risky.” However, there are several factors which are complicating the Conservative narrative.  The first is that Canada is not doing as well as it once was vis-à-vis its global counterparts.

As demonstrated by the recent, and somewhat unexpected, decline in value of the Canadian dollar, our economy is no longer the shining beacon in a world of global uncertainty.  Increasingly, market participants who were attracted to Canada because of its low debt, strong banking system and stability are looking to the US and other countries for stronger growth prospects. The second factor that is problematic for the Conservative economic narrative rests with the opposition parties.  Previously, opposition party leaders had all but ceded the economic management ground to the Conservatives.  With NDP leader Thomas Mulcair and Liberal party leader Justin Trudeau, this is no longer the case.  The fight for middle class voters is on and we can expect this debate to intensify over the coming months.

Understanding the financial picture and the decision-making agenda of the government will be critically important in the months leading up to the next election.  The chart below provides some context for the economic picture over the next ten years.  The government’s overall plan relies on the top line revenues growing much faster than the rate of expenditures.  When Minister Flaherty speaks about holding the line on expenses, he is referring to relatively modest growth of government spending of only 6% from 2010-2016.  This is well below the rate of inflation which has averaged roughly 2% per year.

In short, the government is continuing to impose significant measures to restrict its own spending. By contrast, government revenues are expected to grow by 23.7% over the same period.  This shows that the Finance Minister cannot achieve a balanced budget by holding the line on expenses alone; revenues must grow significantly.  In order for the Finance Minister to achieve a balanced budget, continued economic growth must be present.  This is not just campaign rhetoric: job growth, low interest rates, and low inflation are critically important for the government to achieve its goal of fiscal surplus next year.  This explains the government’s intense focus on job creation, innovation and trade which dominate the first 100 pages of this 427 page budget document.

	Actual			Current	Projections
	’10-’11	’11-’12	’12-’13	’13-’14	’14-’15	’15-’16	’16-’17	’17-’18	’18-’19
Revenues	237.1	248.8	256.6	264.0	276.3	293.3	306.8	317.7	332.4
Expenditures	270.5	275.0	275.6	280.5	279.2	286.9	298.7	309.7	322.1
Balance -/+	-33.4	.25.2	-18.9	-16.6	-2.9	6.4	8.1	8.1	10.3
Federal Debt	550.3	582.2	602.4	616.0	618.9	612.4	604.3	596.2	586.0

 

 

 

 

 

Source: Economic Action Plan 2014

Budget Highlights

• Balanced budget in 2015
• Minister Flaherty lowers outlook for the deficit to $16.6B ($17.9B estimated in November 2013)
• For 2014-15, the shortfall forecast has been lowered to $2.9B from $5.5B
• 2015-16 surplus target raised to $6.4B from $3.7B
• $6.4B surplus next year; projected to grow to $8.1 billion for each of the following two years; $10.3B surplus by 2018-19

 Jobs and the Economy: The Core Conservative Message

The government continues to claim victory in this area by quoting its performance relative to other G8 and G20 countries.  This relative performance looked better a year ago than it does today. The government hopes to drive job growth by moving ahead with signature measures such as the Canada Job Grant which is going ahead on April 1^st, 2014.   This program initially required the provinces to sign on but the government signaled today its intention to move forward with the agreement with or without provincial buy-in. Other initiatives announced today include the creation of a Canada Apprentice Loan by expanding the Canada Student Loans Program. With this measure, apprentices can apply for interest-free loans of up to $4,000 per period.  Under this program, the government anticipates it will assist 26,000 apprentices per year and provide over $100 million in loans to help encourage job growth through apprenticeships.

Baubles for Key Voting Groups

Although Minister Flaherty said that his budget does not contain “flashy spending” or “baubles”, there are several items to note: For the Consumer:

• $305 million over 5 years to expand rural high-speed internet, impacting roughly 280,000 Canadians
• Amending the Telecommunications Act to cap domestic wireless roaming rates
• Proposal to tackle price discrimination that occurs when companies charge higher prices in Canada that are not reflective of legitimate higher costs.

Tax Relief:

• No major tax relief initiatives for families however the budget states the government is committed to keeping taxes low and examining ways to further provide tax relief for Canadians
• New tax credit for Search and Rescue volunteers who would see a 15% non-refundable credit for ground, air, and marine search-and-rescue volunteers who perform a minimum of 200 hours of service per year.
• Adoption Expense Tax Credit maximum will rise to $15,000 from $11,774 per child, applicable  to adoptions finalized after 2013

Rural

• The government is pledging $10 million over two years to improve and expand snowmobile trails across the country

The Program Spending Challenge

• The government has outlined a clear preference for continuing transfer payments to provinces and individuals.  At the same time, it will continue to exercise restraint in growth of other expenditures by freezing departmental operating budgets.

Government Administration

• Major cost saving initiatives:
  • Sick Leave Benefits: Modernize disability and sick leave management system for employees.
    • Intends to pursue changes to the Public Health Care Plan for retired federal employees that are more comparable to plans of other public and private sector employers. These changes are estimated to save up to $7.4 billion by 2018/19.
    • The Government continues to seek out efficiencies to ensure value for taxpayer dollars. The newly established Treasury Board Sub-Committee on Government Administration (TBGA) will build on the success of previous transformational initiatives advanced since Budget 2010.
      • The TGBA will focus on areas such as:
        • Streamlining departmental information technology applications
        • Simplifying processes and reducing administrative costs of the Governments procurement system, while reducing the administrative burden on supplies
        • Modernizing federal office space management
        • Rationalizing the Government’s vehicle fleet

As we’ve stated before, for those seeking to position themselves with the federal government there’s one overarching theme to keep in mind: for the Conservative government the policy dialogue begins and ends with the voter.  The question that must be asked at the outset of any interaction with government is: how do my business objectives align with the stated policy of the government and how does this relate to the voting blocs the Conservatives need to win again in 2015.