Federal Budget 2015: It’s all about the election campaign and it started today

Today’s federal budget entitled, “Strong Leadership, A Balanced-Budget, Low-Tax Plan for Jobs, Growth and Security,” is the first milestone in a six month long campaign leading up to the fixed federal election date on October 19, 2015.

It contained 3 key chapters:

• Creating Jobs and Economic Growth
• Prosperous Families and Strong Secure Communities
• Balancing the Budget

The Conservatives set one main priority for themselves in this budget: it had to be balanced.  So when oil prices plummeted, the Conservatives had to go back and take a closer look at how they could achieve a surplus this year.

Why are the Conservatives so preoccupied with balancing the budget this year?  Two reasons.  First, a balanced budget is integral to the Conservative narrative for the upcoming election campaign.  The Conservatives are presenting themselves, once again, as the faithful stewards of Canadians’ hard earned tax dollars.  Their message is: you can’t trust the Liberals and the NDP who will raise your taxes and spend “recklessly.” We have seen this narrative invoked, with success, many times by the Conservatives.  So, why change a winning formula?

The second reason is because many of the Conservatives’ key tax cut commitments, upon which they were elected in 2011, were contingent upon the budget being balanced. The Conservatives couldn’t defer these campaign promises any longer.

The extent to which Budget 2015 is an integrated component of the Conservative 2015 election campaign script cannot be overstated.  The process leading up to today’s budget started with campaign-style events hosted by Prime Minister Harper in the fall of 2014, where he started to pre-announce some of this budget’s key measures.  These measures include income splitting for parents and an enhanced Universal Child Care Benefit (UCCB) that will include benefits for parents with children aged 6-17.  For the latter, these cheques are scheduled to arrive in July with a lump sum payment for the first 6 months of this year – three months before Canadians go to the polls.

In terms of the opposition, the NDP started to announce some of their key campaign commitments six months ago with the unveiling of their universal child care program; long before revenues decreased because of the plunge in oil prices.  The Liberals have held back on making key platform announcements.  We expect them to start doing so over the next few weeks.

In addition to implementing Conservative campaign commitments made in 2011, part of today’s budget is also designed to anticipate some of the campaign commitments from the Liberals and the NDP that might have been used as “wedge” issues against the Conservatives.    These issues include: middle class and working families; infrastructure, and security review.  The spending commitments announced in these areas are further detailed below.

So what happens next?  The Conservatives will hope that their budget projections stick.  They don’t want to have a debate about the numbers; however, a $1.4 billion surplus does not leave a lot of margin for error.

The chart below provides some context for the economic picture over the coming years.  One glaring difference between the 2014 budget and today’s budget are the forecasted surpluses — which are, as expected, significantly smaller than previously projected.  This leaves little room for any major new spending without significant future revenue growth.  For example, last year’s projection forecasted a surplus of $10 billion for fiscal year 2018-19. Today, the government is predicting only $2.6 billion.

On the revenue side, over the next five years projected revenues will shrink by as much as 2% compared to last year’s estimates, thus removing $18.1 billion from the government purse.  A significant portion of this is due to deferred revenue as a result of income splitting, an increased UCCB, and the reduced small business tax rate.  In addition, this year’s budget projects increased expenditures of 3.7% or $6.4 billion over the next five years.

Any significant change in variables could send the budget back into deficit.  The Conservatives have made it more difficult for any future government to increase spending without increasing revenue.  In fact, the Conservatives boast that since 2006-07, the revenue-to-GDP ratio has been at its lowest in 50 years. Heading into an election, this will be how the Conservatives will frame all opposition spending priorities.

Budget Highlights

• Balanced budget with a surplus of $1.4 billion in 2015/16 (change from projected surplus in Budget 2014/15 of $6.4 billion)
• New “Public Transit Fund” established: $750 million over two years, starting in 2017-2018 and $1 billion/year thereafter
• Lowering of federal tax rate for small businesses from 11% to 9% by 2019

Infrastructure Spending

The government has made significant commitments to increase long-term infrastructure spending, with a focus on innovative and alternative funding for public infrastructure projects.  Highlights include:

• Continuing investment of $5.35 billion per year on average for municipal, provincial and territorial infrastructure under the New Building Canada Fund
• Introducing a new Public Transit Fund, with $750 million over two years starting in 2017-18, and $1 billion every year thereafter
• Creating a new dedicated infrastructure fund to promote the expansion and improvement of existing community infrastructure across the country as part of the Canada 150 celebrations, with no dollar amount announced
• Providing $5.8 billion over six years to build and renew federal infrastructure assets and on-reserve schools across the country, starting in 2014-15
• Continuing to encourage municipalities to employ public-private partnerships for public infrastructure projects

Targeting Key Voting Groups through Tax Relief Measures

Tax relief for families include the following measures:

• Expansion of Universal Child Care Benefit (UCCB) to include children aged 6-17, for a benefit of $60/month/child
• Family Tax Credit of up to $2,000 for couples with children under the age of 18
• $1,000 increase in each of the maximum dollar amounts that can be claimed under the Child Care Expense Deduction, effective for the 2015 taxation year
• A doubling of the Children’s Fitness Tax Credit from $500 to $1,000/child/year
• Increasing the TFSA annual contribution limit to $10 000, effective in 2015 and subsequent years

Caring for vulnerable in our communities:

• Reducing the minimum withdrawal factors for Registered Retirement Income Funds for seniors
• Introducing the Home Accessibility Tax Credit to help with renovation costs to make homes safer and more accessible for seniors and persons with disabilities, starting January 1, 2016
• $150 million over four years to support social housing in Canada by allowing social housing providers to prepay their long-term non-renewable mortgages without penalty
• Extending Employment Insurance Compassionate Care Benefits from six weeks to six months for Canadians caring for gravely ill and dying family members

Security Related Measures

The Conservatives continue to call Canada a beacon of economic stability and security in an unstable world and they have used the budget to underline this narrative.  The budget is riddled with mentions of the impact of geopolitical uncertainty on Canada.  This is another key theme for the Conservatives heading into the fall.  The message is: “These are times of immense opportunity for Canada – but also of substantial risk.”

The budget includes several measures for protecting the physical and cyber security of Canadians both at home and abroad:

• Increasing the annual escalator to 3% for national defence spending, which amounts to $11.8 billion over ten years, starting in 2017-18
• $58 million over five years to further protect the Government of Canada’s essential cyber systems and critical infrastructure against cyber attacks, starting in 2015-16
• $23 million over four years on a cash basis to upgrade the physical security of Canadian Armed Forces bases, starting in 2015-16
• $12.5 million over five years and $2.5 million ongoing thereafter in additional funding to the Security Intelligence Review Committee to enhance its review of the Canadian Security Intelligence Review, starting in 2015-16
• $2.5 million to Industry Canada to increase the analytical capacity needed to support the Defence Procurement Strategy, starting in 2016-17

Government Administration

The Government’s big initiative on government administration is the previously announced Balanced Budget Legislation.  The Government is also focusing on streamlining and standardizing policies across government to ensure ethical business practices and value for money.  Included in the budget are measures to introduce a new government-wide integrity regime for its procurement and real property transactions and to strengthen tax compliance by combating international tax evasion and tax avoidance.