The budget that could have been

Even in the worst of times, budgets are rarely hemmed in by “economic necessity.” They are reflections of the values of the party in power. One government might look at economic data predicting low growth for the next five years (the current reality) and choose to cut program spending. Another might pump some money into infrastructure projects, or enhance public services, to create good jobs and kickstart the economy, as the Liberals chose to do in Budget 2016.

Or you could do neither—hold the line on spending, postpone potentially controversial (but needed) tax loophole closures, add a $3-billion safety cushion to the deficit, then cross your fingers and hope oil and gas prices go up. And there, in a nutshell, is Budget 2017.

There was plenty of criticism that yesterday’s federal budget didn’t have an ambitious program to tackle the big issues of the day: climate change, income inequality, stagnant wages, high household debt and a rigged tax system. It talked a good game on progress and helping a struggling middle class, but it held back in critical areas where added spending would make a big difference.

Every year, our Alternative Federal Budget (AFB) looks at the progressive choices a federal government could take, in more than 20 policy areas, if it was interested in lowering poverty, reducing inequality, transitioning to a low-carbon economy, and closing the racially- and gender-based pay gap, among other priorities. We cost out every policy, and while the AFB has, in the past two years, recommended higher deficits than the federal government, these are more than made up for in job and income growth for the vast majority of Canadians.

Four examples from the AFB help explain what might have been in Budget 2017 had the government chosen to apply itself more actively, yet cost-effectively, in the pursuit of what it calls inclusive growth.

Child care

The federal budget did announce more details on long-term funding for child care. This isn’t new money (it was already allocated in last year’s budget), but it did build those expenditures into a “fiscal framework” for the next decade, and slowly ramped up spending from about $540 million now to $870 million by 2027-28.

This long-term commitment hasn’t existed since Paul Martin’s 2005 child care framework agreement, which was subsequently cancelled to pay for the Universal Child Care Benefit introduced by the Harper Conservatives. This raiding of existing “fiscal framework” funds is a cautionary tale that just because you budget out a decade it does not mean the next government will go along with your plans.

The long-term funding commitment in Budget 2017, with the integrated provincial agreements that will flow from it, creates a foundation for future expansion. However, the announced spending levels will likely have a limited impact on long wait lists and high fees—arguably the two most important issues for child care in Canada.

To compare, the Alternative Federal Budget starts at the same $500-million level as last year’s federal budget, but then ramps up to $1.6 billion in 2018 and $2.6 billion in 2019. Spending must rise in this way to ensure the expansion of child care (there is a need for about 500,000 new spaces today). Even the Martin child care framework of 2005 maxed at $1.6 billion a year (in today’s dollars), roughly twice the maximum proposed by the Trudeau government.

For added context, Quebec’s capped fee system, where parent rates start at $7 a day, costs the province roughly $2 billion a year. Extending a similar plan to all children in Canada would cost roughly $10 billion a year, which would be cost-shared with the provinces. Even if the feds kicked in $5 billion a year, you can see how far we are from a large-scale affordable child care system.

Tax loopholes

The federal government spends more than $100 billion per year on tax expenditures of various kinds. Many of them, like the 50% capital gains inclusion and the dividends gross-up, are essentially loopholes for the wealthy—tax breaks whose benefits are enjoyed by a very small number of high-income earners.

Many economists predicted the government would make a move toward tax fairness by closing some of these expensive loopholes in the budget. They were wrong. Instead, the Liberals cut a handful of inexpensive “boutique” tax credits, including one applied to monthly public transit passes that costs the government $200 million a year. Though the Alternative Federal Budget endorses reforms to Canada’s messy and ineffective tax credit regime, these were small fish to fry.

The bigger fish include items like the stock option deduction ($700 million a year), the already mentioned capital gains inclusion rate, which taxes gains from selling assets like stock at 50% versus 100% for regular income ($5 billion a year for individuals and another $5 billion for corporations), pension income splitting ($1.3 billion a year), and credits for meals and entertainment for corporate boxes ($200 million a year).

Even just cancelling the most egregious tax credit—the stock option deduction—would let the government double its proposed child care funding (see above). This credit is claimed by only 64,000 out of 26 million tax filers, and 99% of the benefit goes to the richest decile. I’m concerned that inertia against making the tax system fairer has now set in and we will never see these big fish in the skillet.

Gender

The gender analysis in this year’s budget was a first and, as analysis goes, it was surprisingly good. We’ve been assessing the differential impact of AFB measures on women and men for several years, as do many OECD countries. We’re glad to see the approach finally adopted by the federal government. But there are wrinkles.

For example, this year’s federal budget has extensive spending tables after each chapter—except the one on gender. It includes a new $100 million over five years for domestic violence. In comparison, the Alternative Federal Budget argues it will cost at least $500 million annually to truly address the $12-billion-per-year cost of domestic violence.

Status of Women Canada, the department responsible for gender analysis, has seen no change to its budget in 2017, despite the list of unanswered needs identified in the budget’s gender analysis. The AFB, on the other hand, allocates $100 million a year to increase the department’s budget and start tackling that analysis.

Climate change

On climate, the budget takes a step in the right direction, with new spending on green infrastructure, clean technology, energy efficiency regulation and other measures. Unfortunately, the total funding on offer falls short of what we need to transition Canada to a low-carbon economy.

Budget 2017 allocates just $3.1 billion over five years for clean technology and other climate-specific initiatives, compared to $1.4 billion annually in the Alternative Federal Budget. More importantly, by spreading out the previously announced Low Carbon Economy Fund over five years instead of two, Budget 2017 actually cuts federal spending on climate measures in the first two years.

When it comes to new spending on green infrastructure and public transit, Budget 2017 promises $8.4 billion over five years, but that’s not nearly enough to reduce our emissions and prepare the country for a changing climate. The AFB calls for $11.9 billion annually for vital new infrastructure, like wastewater treatment facilities and public transit systems. Unlike the federal budget, the AFB ensures all those assets are publicly owned.

The budget also fails to seriously address fossil fuel subsidies in Canada, which currently cost $1.5 billion per year and directly undermine Canada’s climate goals. In fact, the budget extends one subsidy—the mineral exploration tax credit—by another year.

To be continued?

As a few commentators have pointed out (see Paul Wells and Chantal Hébert, for example), in general Budget 2017 kicks spending and plans further down the road, to be dealt with perhaps in budget implementing legislation or future economic updates. (TD Economics called this a “market-neutral” budget, unlikely to push the TSX much in either direction.)

As a political strategy, it’s pretty smart: with spending contained and near-term deficits likely overstated, the government is in a better position to throw some money around and look fiscally in better shape a year ahead of the next election. However, Budget 2017 is a poor response to our immediate needs to address inequality, poverty and climate change.

This was a missed opportunity to take billions of dollars out of unfair tax expenditures for the one per cent and apply that money to expanding public services, building affordable housing, transitioning to low-carbon economic growth, and strengthening Canada’s overall social safety net.


David Macdonald is a senior economist with the Canadian Centre for Policy Alternatives. Follow him on Twitter @DavidMacCdn

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