Federal Budget 2000
Federal Budget 2000
Highlights and AnalysisGeneral Overview
- Paul Martin's 2000 federal budget clearly put the main focus on tax cuts, not reinvestments in essential public programs like health care and education.
- This was without doubt Martin's most important budget since 1995, when he first launched his war on the deficit. With this budget Martin announced his plan for allocating future federal surpluses. It's clear that Martin has bowed to pressure from business lobbyists and high income earners, who have pressed so hard for big cuts in personal and corporate income taxes.
- The budget announced a range of different tax cuts, which will reduce total taxes by a cumulative total of at least $58 billion (and probably more) over the next five years. That's considerably more than even right-wing business lobby groups were expecting.
- Department of Finance officials believe that the total federal surplus over the next five years will equal about $100 billion. That means the federal government will allocate a full 60 percent of that surplus to tax cuts over the next five years.
- The government will also set aside significant funds for debt reduction during this time: at least $15 billion ($3 billion per year), and possibly as much as $25 billion.
- That leaves only about $15-25 billion for spending on public programs-including both the repair of previous programs damaged by the cutbacks of the 1990s (like health care, UI, and higher education), and funds for important new programs (like a national child care system or a pharmacare program).
- The Liberals have thus deviated dramatically from the "50-50" rule on which they won the 1997 election. According to this rule, they would spend half the surplus on programs, and the other half on tax cuts and debt reduction. After this budget, the "50-50" rule has become (at best) a "25-75" rule.
- Program spending (which includes all spending except for interest payments on the debt) will continue to decline as a share of Canada's economy under this plan. Federal program spending has already declined from 16% of GDP in 1994 to less than 12% today. This budget reinforces the general retreat of the federal government from our economic and social lives-except now this retreat is being conducted as a matter of choice, not because of a lack of money.
- Public opinion polls have consistently shown that Canadians
prefer reinvestments in health care, education, and other
essential services to tax cuts. With this budget the Liberals
have shifted clearly to the right of the Canadian population.
They have done this possibly to undercut the political appeal of
Reform, and possibly to silence their loud critics in the
business and media communities.
Personal Income Taxes
- The announced tax cuts include several different changes to the personal income tax system.
- Most of these are bundled together in a so-called "middle-income" tax package. This includes a reduction in the middle income tax rate (from 26 to 24 percent this year, and to 23 percent by 2004), significant increases in the middle and high-income tax bracket thresholds (from $29,000 to at least $35,000 for the middle bracket, and from $59,000 to at least $70,000 for the top bracket), and the phased elimination of the current 5 percent surtax on high-income earners.
- While this is called a "middle-income" tax break, in reality it offers the richest benefits to the high-income earners. You must earn at least $85,000 per year to qualify for the full value of this "middle-income" tax break. For those earning above $85,000, these breaks are worth about $2150 per year.
- The tax savings received by most lower- and middle-income Canadians will be more modest. The basic personal exemption will be increased slightly (to at least $8,000). For taxpayers without dependent children and who earn $35,000 or less, this will be the only direct tax break they receive. It is worth only about $250 per year at most.
- The tax system will be adjusted in future years to reflect inflation, eliminating the problems of "bracket creep" and "credit erosion" that have resulted in higher tax burdens in recent years. This is a sensible move that was also advocated by the Alternative Federal Budget.
- The 2000 budget also expands the existing Child Tax Benefit program. The maximum benefit will increase to $2400 for the first child (from $1800 at present), and the clawback provision of the benefit is scaled back so that more middle-income families will receive at least some of the benefit. This is also a good measure-although the government could have allocated much more to this program, and it retains the repressive feature that provincial governments can clawback all of the benefits received by families on welfare. Since the Child Tax Benefit is paid even to families which pay no tax, this program is more of a social benefit than a tax cut.
- A variety of other smaller personal income tax changes are included in the budget, including a range of measures intended to reduce taxes on capital gains income (profits derived from the sale of stocks, bonds, and other assets at higher prices than they were purchased for). Virtually the full benefit of these measures is captured by the very richest segment of society.
Other Tax Cuts
- The budget announced a one-quarter decrease in corporate taxes for certain economic sectors (from 28 percent to 21 percent). Manufacturing and resource industries (which already pay lower tax rates) are excluded.
- In general, we will want to focus most of our fire on the larger personal income tax cuts (which will cost about $15 billion per year by 2004) rather than on the corporate income tax cuts (which will cost $3 billion per year by 2004). In the case of corporate taxes, a certain argument can be made that lower taxes will result in larger profits and hence higher business investment. We would prefer to see targeted performance-linked measures (such as an investment tax credit system), rather than a general corporate tax cut. But nevertheless the argument can be made that there will be a (small) positive impact on growth and job-creation.
- With the personal income tax cuts, however, no such argument can be made. The goal is not one of "growing the pie". It is, rather, aimed at redistributing the pie from bottom to top: leaving well-off Canadians with even more money in their pockets, and reducing the value of the "social wage" which working Canadians receive.
- Small business taxes will also be cut, reducing the rate of tax paid on income between $200,000 and $300,000 to 21 percent from 28 percent. [They already pay taxes of only 12 percent on the first $200,000 of income.] We would tend to be highly skeptical of this measure: given the generally low business investment and lousy working conditions typical of most small business in Canada, we should not be increasing our already large public subsidy to this relatively unproductive sector of the economy.
- The budget also confirms the previously-announced reduction in UI premiums, worth a total of $1.4 billion in the current year (60 percent of it received by employers).
- Rules governing the eligibility for and length of parental leaves in the UI system will be modestly relaxed. This will increase UI benefits by less than $1 billion per year. And since underlying UI costs are falling anyway (thanks both to lower unemployment and to the harsh eligibility rules of the system), this change is basically "free" for the government: there is no increase expected in UI benefit costs, and the program as a whole will continue to run a huge (and immoral) $6.5 billion surplus next year.
- The absence of any tangible commitment to a national child care program is a glaring failure of this budget. It puts token money into community "child development centres," and announces an initiative to begin consulting with the provinces on a joint plan, but the budget puts nothing into actual child care. A growing body of scientific evidence shows the crucial importance of quality early child development programs to the lifelong intelligence and productivity of future generations. The money is there to fund a quality public child care program, but the Liberals have failed to meet this historic challenge.
- The budget allocates $2.5 billion from last year's revenues to a one-time special grant (spread over the next four years) to the provinces to help cover the costs of health care, education, and social welfare. This continues a bizarre practice initiated by Paul Martin of spending-at the last minute-some of the hoards of surplus cash the government accumulates in the course of a year. Any money for health care and other provincial programs is a help, of course, but this unreliable and ad-hoc method of dispersing the funds is completely unacceptable.
- The budget also announces modest funding for a range of
different research and infrastructure initiatives, including more
money for granting agencies, municipal sewage and transportation
facilities, and the Coast Guard. This is sensible and long
overdue, and once again the allocated funds are sorely inadequate
to the challenge faced by Canadian cities and research
- Total program spending increases in the budget by a measly $500 million over 1999 levels (or by $3 billion if the one-time $2.5 billion grant to the provinces is excluded). Program spending will continue to fall, therefore, when measured as a share of Canada's GDP, to well under 12 percent-by far the lowest level of federal program spending since World War II.
Deficits and Debt
- In theory the budget is "balanced" for the current and future years. In reality, it actually allows the government to continue to generate large surpluses.
- Over the last three years, the federal government has taken in $32 billion more in taxes than it has spent on all programs and interest costs. It declares only a small portion of this as an actual "surplus" (only about $3 billion per year). The rest is hidden by various accounting practices which effectively "charge" the government for money it hasn't actually spent.
- These surpluses-visible and hidden-will continue in coming years.
- The combination of federal surpluses with ongoing growth in Canada's economy is producing a very rapid fall in the federal debt burden. Measured as a share of GDP, the federal debt has already fallen from a peak of 72 percent in 1995 to barely 60 percent today. It will continue to fall to below 45 percent in the next five years. For all intents and purposes, the so-called "debt crisis" is clearly over. Indeed, the fact that this "crisis" could be solved so quickly suggests it was hardly a crisis in the first place (although we do not deny that Canada's finances were in sad shape).
- The debt that the government actually owes to banks, bond-holders, and other lenders is even smaller than this. About 15 percent of the reported federal debt is money the government owes to itself (for future pension payments to public servants, for example). The debt actually owed to the financial community now equals just 50 percent of Canada's GDP, and this too will fall rapidly in coming years.
- Thanks to the falling debt burden, the importance of interest payments on that debt is also declining rapidly. Next year interest costs will consume only about 24 cents of each dollar collected by the federal government in taxes-compared to a peak of about 36 cents in 1995. This happy trend will continue to open up more room for either or tax cuts (preferably) program spending in future years.
The Alternative Federal Budget
- For the sixth consecutive year, the Alternative Federal Budget (co-sponsored by a range of labour and community groups, including the CAW) showed that it is possible to both provide ample funding for important public programs while still managing public finances in a responsible and sustainable manner.
- This year's AFB showed that by allocating the entire future
surplus to urgent reinvestments in health care, child care, and
education, the federal government could allocate $16 billion more
to programs in the coming year without raising taxes and without
incurring a deficit.
- More details on the AFB can be obtained from the Web site of the Canadian Centre for Policy Alternatives (www.policyalternatives.ca) or by contacting the CAW Research Department