Canada Budget 2012: Moody's, Fitch Ratings Question Need For Ottawa's Austerity Agenda

Jim Flaherty

The Huffington Post Canada   First Posted: 02/14/2012 2:50 pm Updated: 02/14/2012 2:52 pm

The federal government doesn’t need to ramp up spending cuts, and implementing them could harm Canada’s economy as it struggles with weak global demand, two major ratings agencies have said.

Steven Hess, the lead Canada analyst for Moody’s, told the Wall Street Journal that there is a “risk to growth” if the government moves too quickly with austerity measures designed to return the country to balanced budgets.

With a budget deficit that amounts to about two per cent of GDP, there is “no rush” for Canada to address the problem, Hess said.

Though Ottawa has been systematically finding efficiencies in government departments since 2007, lower tax rates and the global economic crisis have forced the government into deficit spending in recent years.

Ahead of this year’s budget, expected to be tabled before the end of March, the Prime Minister’s Office has asked government departments to find 10 per cent in spending reductions.

The government has also floated the notion of reforming the Canada Pension Plan and Old Age Security, ideas that were met with political resistance before the Finance Minister Jim Flaherty softened his stance somewhat.

According to a study from the Canadian Centre for Policy Alternatives, the budget cuts will cost 60,000 to 68,000 public service jobs by 2015-2016, when Ottawa aims to have brought the budget back into the black. The CCPA estimates the cuts could raise unemployment by half a percentage point, to more than 8 per cent at the current level.

"You don't have to swallow an extremely bitter pill if you are not sick," Fitch Ratings analyst Shelly Shetty told the Journal. She suggested any acceleration of spending cuts to beat the 2016 deadline was “not required.”

The Harper government hasn’t been inflexible on its budget goals, and Flaherty has on occasion signalled he is willing to put cuts on the back burner if the economy takes a turn for the worse.

Opponents of the government’s austerity measures point to the extreme example of Greece as an indicator that cutting too quickly and deeply can damage an economy.

Greece’s statistical authority reported this week that its economy is shrinking at a 7 per cent rate, with economists laying the blame squarely at the feet of deep spending reductions as Greece struggles with an overwhelming debt load.

The shrinking economy has sent Greece into a vicious circle, where budget cuts cause reductions in government revenue, making it even more difficult for the country to pay its debts.

Though Canada’s budget shortfall isn’t comparable to Greece’s opponents of austerity argue the southern European country’s situation is proof budget deficits should be fought during times of economic strength.

The ratings agency analysts cited by the Journal nonetheless gave Canada’s government high marks for focusing on an issue they say speaks directly to Canada’s credibility on the global economic stage.

"Achieving fiscal consolidation and the balanced budget targets are important to maintain credibility," Shetty told the Journal.

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  • Big Canada Pension Plan Changes Coming In 2012

    Ottawa is bringing in a raft of new or tweaked policies to reflect that retirement these days is more of a gradual transition for many people rather than a single event. Many of these changes either begin in 2012 or are entering the next phase-in period, and they'll have a direct impact on the retirement plans of Canadians. In some cases, the changes are big enough that people nearing retirement may want to have a chat with a financial adviser before deciding exactly when to apply for a CPP retirement pension. (Justin Sullivan/Getty Images) <em>With files from CBC</em>

  • 1. Early CPP, Lower Benefits

    The first change involves payment rates. People can choose to take a CPP retirement pension as early as age 60. But there's a catch: A 0.5 per cent reduction in the pension payout for each month before age 65 that someone begins receiving it. That translates into a retirement benefit that's 30 per cent less at age 60 that it would be if you waited until 65. Starting in 2012, Ottawa is beginning to phase in a bigger reduction to get that early access. For 2012, the penalty rises to 0.52 per cent per month -- or a 31.2 per cent reduction for someone who starts receiving their retirement pension at age 60. The early-bird reduction will continue to rise until 2016, when it hits 0.6 per cent per month, or a maximum 36 per cent reduction for those who start receiving CPP payments at age 60 rather than waiting until they reach 65. (Getty)

  • 2. Later CPP, Bigger Benefits

    Similarly, those who wait until after the age of 65 to start collection CPP will get a bigger increase in their retirement benefit. Before 2011, the rules stated that the CPP retirement benefit was boosted by 0.5 per cent for each month after age 65 that an individual put off receiving it. So someone who waited until age 70 would enjoy a 30 per cent boost in their payments. But starting in 2011, the government began to phase in a gradual increase to that delay bonus. For 2012, the increase for each month after 65 that a person delays applying for CPP goes to 0.64 per cent -- or a maximum increase of 38.4 per cent for those who start receiving a pension at age 70. By 2013, the maximum bonus moves to 42 per cent. These changes won't affect people who are already receiving CPP benefits. They are being made, according to Service Canada, to restore these adjustments to "actuarially fair levels," so there are "no unfair advantages or disadvantages to early or late take-up of CPP retirement benefits." (Getty)

  • 3. Drop-Out Years Increase

    Canadians currently don't need to contribute to the CPP every year from age 18 to age 65 to get a full CPP retirement pension. When someone's average earnings over their contributory period are calculated, 15 per cent of their lowest earning years are automatically ignored when the calculation is made. For someone who takes their CPP retirement pension at age 65, that means seven years of low or zero earnings are dropped from the equation. But starting in 2012, that "general drop-out provision," as it's called, goes up to 16 per cent. For someone eligible for CPP benefits in 2012, that will allow up to 7.5 years of the lowest earnings to be excluded from the calculations -- boosting the retirement benefit paid. In 2014, the percentage will rise again to 17 per cent, which will allow up to eight years of low earnings to be dropped. These changes can really benefit people who entered the workforce late, who were unemployed for a long time, or took time off to go back to school. One point to note is that there are separate drop-out provisions specifically for time spent out of the workforce because of disability or to have children. (Alamy)

  • 4. 'Work Cessation Test' Dropped

    CPP rules used to require that someone stop or drastically reduce the amount they earned during the two consecutive months before they began to receive a CPP retirement pension. This was, for many Canadians, an annoying and costly requirement -- especially since so many people now ease into retirement instead of stopping work completely. Now, that rule is history. Beginning in 2012, the "work cessation test" has been eliminated. (<a href="http://www.flickr.com/photos/misteraitch/" target="_hplink">Flickr: misteraitch</a>)

  • 5. Post-Retirement Benefits

    There's another rule change that's important for semi-retirees to be aware of. Before 2012, if someone started receiving a CPP retirement pension early -- say, at age 62 -- they didn't have to make any CPP contributions if they decided to collect payments but also keep working after age 62. Starting this year, if you are under age 65 and continue to work while also drawing a retirement pension, you and your employer must make CPP contributions. The good news for employees is that these extra contributions will be credited to what's called a Post-Retirement Benefit (PRB), which will result in a higher CPP retirement pension in the year after you make contributions to your PRB. This measure is a nod to the reality that many "retired" Canadians are still working. Canadians who continue working after age 65 and are receiving a retirement benefit will have the choice of whether or not they want to make CPP contributions. If they choose to make them, their employer must kick in their share too. Those additional contributions will go towards higher benefits beginning the year after the PRB contributions. (<a href="http://www.flickr.com/photos/elwillo/" target="_hplink">Flickr: Keith Williamson</a>)

  • 6. Premiums And Benefits Rise

    CPP benefits are always adjusted to reflect the rising cost of living. For 2012, the increase in benefits is 2.8 per cent. That will bring the maximum monthly CPP retirement pension to $986.67. Contribution rates are unchanged. But since the yearly earnings maximum that the rate applies to is going up, the maximum annual contribution will rise by about $89 in 2012 to $2,306.70 for both employees and employers. (<a href="http://www.flickr.com/photos/redvers/" target="_hplink">Flickr:R/DV/RS</a>)

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