Cold Hard Wonk

No sentiment but politics

Federal Budget, Part One

Posted by JJ in Strategic Planning, Brass Tacks (Tuesday March 20, 2007 at 8:13 pm)

There are a few things in the recently-released 2007 Canadian federal budget which point at policy rather than at programs. Now it’s easy to give them the once-over, with patent pending double-entry budget analysis!

Middle Class Incentives

The budget has a horde of provisions aimed squarely at the middle class, calibrated for greater effect at its lower end. These include:

  • Child Tax Credit of $2,000 ($310 tax reduction per child)
  • Increased Spousal Amount ($209 tax reduction where a single spouse supports the household)
  • Broadening the scope of the transit fare tax credit
  • Increasing the 48 hour duty-free exemption to $400 from $200
  • A new rebate program to encourage the purchase of lower-emission vehicles

So how does all this stack up?

Political Value
Very high

Middle-class Canadians have seen their costs of living increase significantly, while most attention usually goes to lower-class income earners and the unemployed. The middle class usually feels ignored, whether justifiably or not, but constitutes the single largest group of certain voters. These offerings benefit them (and especially lower middle class taxpayers) more than other groups for a few reasons:

  • They’re well-off enough to buy cars, but rarely to spend much on them — a rebate for cars they were more likely to buy (cheaper, smaller models) is a big plus.
  • Those who don’t take cars likely still commute to work — adding kinds of fare passes to the existing rebate scheme is a plus
  • Families with one supporting partner are disadvantaged because the same amount of money, earned by a single taxpayer, is more heavily taxed than that amount split between two taxpayers. By increasing the spousal allowance, that problem is eased.
Investment Value

You could invent an elaborate theory about how the only way to improve economic performance is by increasing consumption and explain why a happy, spendthrift middle class is the most efficient way to accomplish that; but there are probably better ways to get the middle class to increase spending — further GST reductions, for instance. Besides which, increased exemptions for personal imports don’t really help the domestic economy.

You could also talk about how downtrodden the middle class is, but in all fairness, there are others more downtrodden than them.

In the end, if the program’s greatest impact is to ease the tightness in lower-middle-class budgets, it’s not clear exactly how the amounts in question can be expected to really benefit the economy long term. The best use for the money for the average beneficiary would be to offset existing personal debt.

Business Incentives

A number of entries are aimed at improving business prospects:

  • $500 Million, to be accessed through provincial programs, for employers to train workers.
  • A new office, plus increasing spending on public-private partnerships.
  • Simplifying tax and other paperwork for small businesses.
  • Increasing the lifetime capital gains tax exemption for small business owners.
  • $270 Million for Centres of Excellence in Commercialization and Research
  • Targeting $11 Million of new research council money for management, business, and finance research.
  • $50 Million plus over several years to sponsor new private-sector-oriented research at universities.
  • $80 Million to improve Temporary Worker programs and other immigration-related initiatives to provide workers in booming industries.
  • Accelerating tax write-offs on capital investments by manufacturers.
Political Value

Most folks driven ideologically by dreams of public-private interaction are already in the Conservative camp. There’s little to be gained from appealing to them, unless you figure that the rest of the budget is likely to turn them off.

Apart from small business owners (which really hearkens back to the category of middle-class Canadians), there aren’t many incentives here for parties as yet to be won over. It’s mostly a sop to industry, and not much of one at that.

Investment Value

We’re talking, mostly, about saving businesses much of the expense of conducting their own research. That constitutes an investment in advancing the products and services of Canadian businesses; and providing them with a cheap source of labour, temporary and more permanent, is an extra boost to that. But it’s not much of one; and getting business to rely on that kind of help may not be as good for the long term as it is for the short-term balance sheet.

Allowing manufacturers to write off their investments more quickly may make Canadian manufacturing somewhat more competitive; but can it really make it competitive with the real sources of manufacturing competition: China, India, and our trading partner Mexico? Seems unlikely.

Debt = Taxes

The new budget contains at least one policy objective which isn’t so much a spending item as a pledge: that any reduced servicing costs derived from paying down the national debt will be converted directly into personal tax relief.

Political Value

Voters are justifiably jaded about pledges for theories of allocating spending. If promises on tax relief can’t be believed, who can get excited about promises of where the money comes from for the tax relief?

Investment Value
Very Low

The debt wasn’t accumulated because of increases in taxation. What’s the logic in connecting decreases in debt to decreases in taxation? The mere fact that the country is in severe need of investment in infrastructure suggests that the better use for such savings would be to direct them at that. After all, investment in infrastructure really is investment; and the debt was racked up while buildling the infrastructure in the first place.

If the tax relief provided is along the lines of that witnessed in this budget, then there’s not much reason to prefer it to useful spending on roads, water systems, and other infrastructure as quickly as possible. More to the point, compared to infrastructure spending, money aimed at tax relief just isn’t a very important investment.

And there you have the overview. Yes, there are other programs and spending items in the budget. Some are about infrastructure, some are about the oil sands in Alberta; and most of them get enough press already. But these elements are the real indicators of the government’s political direction; and comparing their political virtues to their investment value, only one conclusion can be drawn:

That’s for tomorrow, in Federal Budget, Part Two.

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