As an economic slowdown bites into government revenue, the anti-tax hike Conservatives will resort to slashing more programs in Thursday’s budget to balance the books by 2015.
But why are the Tories so bent on that goal at any cost?
There is no pressing economic need for a balanced budget in the next two years; it will make little difference for Canadian households whether it takes another year or two, economists say. Instead, the 2015 target may be pivotal for the Tories for another reason: a successful re-election campaign.
Canada is due that year for its next election – one that, if won by Conservatives, would see them holding the reins of power for more than a decade.
While balanced books may not seem like the sexiest election issue, it opens the door for two key Conservatives promises: a $2.5-billion tax break allowing parents to split income and doubling the $5,500 contribution limit for tax-free savings accounts.
Finance Minister Jim Flaherty revealed projections in November that indicated the deficit will be significantly higher in each of the next four years and will not be completely eliminated until 2016-17. Despite what those numbers suggested, Flaherty and Prime Minister Stephen Harper have since insisted that the government can balance the budget by 2015.
The Conservatives are standing by that plan even as economists downgrade 2013 growth expectations from the two per cent projected in November, a problem that Finance Minister Jim Flaherty has said could cause a “significant” hit to government revenue this year.
“In the face of a fragile global economy, the Harper Government is preparing for the upcoming budget with a focus on supporting economic growth and job creation and returning to balanced budgets by 2015,” Finance Minister Jim Flaherty said when he announced the date for budget delivery last week.
One reason for their confidence is Ottawa’s $3-billion contingency fund that could cover the shortfall if the 2015 deficit remains lower than that reserve.
Parliamentary Budget Officer Kevin Page has another reason for their optimism: Ottawa may be overestimating the hit to revenues from the economic slowdown, giving itself the opportunity to surprise voters with good news prior to the election.
November’s 2012 deficit projection of $26 billion now appears too high based on government fiscal updates from the first nine months of the year, RBC said in a budget preview that suggested the 2012/13 deficit could be closer to $20 billion.
A balanced budget indicates responsible money management. Just as households must pay more down the road when they borrow to subsidize costs, governments also run the risk of racking up dangerous levels of debt that can lead to economic ruin (see: Greece).
But critics argue that, when the economy is struggling to grow, it is safe to delay the goal of a balanced budget in order to tackle more immediate challenges, such as high unemployment and low productivity, and it is exactly the wrong time to introduce austerity measures that will further inhibit growth.
Flaherty has been clear that he has no intention of ramping up spending to stimulate the economy, or of introducing any tax increases, and that, instead, he will trim further to meet his 2015 target for a balanced budget.
Craig Alexander, chief economist at TD Bank, said the question is not whether the government can achieve the 2015 target, but “how much restraint on spending are they going to have to apply in order to achieve that goal?”
He said there is no “economic imperative” to create a balanced budget by 2015, given that the country’s balance sheet remains the envy of the industrialized world.
“Whether there’s a small deficit or small surplus in 2015 or 2016 really is not that important. It might be important from a political view; it’s not that important from an economic perspective.”
Even conservative columnist Andrew Coyne wrote in the National Post that he cannot see it “mattering much either way” if the deficit is not eliminated in 2015.
“We do not all turn into pumpkins if the budget comes in $2- or $3-billion to the bad; neither would cuts of a few billion dollars in government spending do much to hold back an economy that is about to hit the $2-trillion mark.”
However, Gregory Thomas, federal director of the Canadian Taxpayers Federation, said that the government risks raising the ire of Canadian taxpayers if it doesn’t meet the 2015 target.
For his group, a balanced budget is about not just fiscal prudence but also ensuring that the government keeps its election promises to allow income splitting and raise the TFSA limits.
“They said both of those things had to wait until the budget was balanced, and we’re kind of sick of waiting,” he said.
The finance minister has said he will not touch transfer payments to provinces and territories for education and healthcare, which account for about one-third of budgetary spending. He also plans to maintain spending on individuals such as seniors, people with disabilities and children – another third of the budget.
So the government is left to cut discretionary spending, the remaining third of the budget.
There are indications that the defence budget could see another $32 million cut and that restraint could be extended to areas such as environmental regulations and border security, among other government programs. The only revenue-raising measures are expected to come from closing tax loopholes, according to the report by RBC Economics.
With just a small pool for spending, the government is expected to reallocate funds to areas of priority. Reports suggest that it will focus on infrastructure spending and skills training to better match unemployed workers to available jobs.
And although investing in infrastructure and skills training will not solve the country’s bigger problems of weak productivity and competitiveness, Alexander said, it will help to alleviate some of those challenges contributing to slow growth.
“The government has very limited fiscal room to work with,” he said. ”They aren’t going to have a lot of money to announce big programs, so they really have to pick their spots.”
Balancing a budget is a daunting task, with any government facing pressure from fiscal conservatives calling for further slashes and liberals calling for increases in spending.
Take the very different shadow budgets proposed by right-leaning C.D. Howe Institute and left-leaning Canadian Centre for Policy Alternatives.
The C.D. Howe plan suggests the government could return to surplus by 2014-2015, a year ahead of the plan, through further belt-tightening.
The government needs to keep that balanced books target before the election in order to honour its promises and avoid alienating potential Conservative voters, said Alexandre Laurin, C.D. Howe’s director of research.
“If you want greater accountability of government, it’s better that it’s within the mandate, because then governments can be held accountable,” he said.
Still, Laurin concedes one year of delay toward a balanced budget “will not make a huge difference.”
“The importance here is we need a target. If you target four or five years from now, many things can happen and you may never reach a surplus. You need to do what is necessary to get to your goals.”
Meanwhile, the CCPA believes its proposal can achieve a balanced budget by 2016, a year later than the government plans, while avoiding “growth-killing austerity” measures, which it points out have done little in Europe but help sink economies while driving up deficits as government revenues collapsed.
“We have a huge amount of fiscal room at a time when we could be doing a lot more at record low interest rates to invest,” said David MacDonald, senior economist at the CCPA.
“Our debt burden is going down over this whole period despite the fact we're running these small deficits, so it’s not really an economic issue. Deficits for the federal government at this point are an electoral issue.”
He accused the government of cutting crucial services so high income earners can get tax breaks ahead of the election, adding that the TFSA changes will also mostly benefit those with large bank accounts.
“They promised they’d balance the books before they’d enter new measures that would unbalance them,” he said, referring to the income splitting and TFSA pledges.
Still, TD's Alexander noted that there may be some austerity measures in the budget, but not to the degree seen in other countries around the world.
For example, he said, the heavy-handed spending cuts mandated in the U.S. are expected to slow growth by 1.3 percentage points this year, while restraint in Canada is expected to hit the economy by a much smaller 0.5 percentage points.
Also on HuffPost:
Austerity Measures Devastate Communities Around The World
<a href="http://www.huffingtonpost.com/2012/07/12/austerity-measures-a-thousand-cuts_n_1666309.html">CLICK HERE to read the full story.</a> The austerity budget, conservatives' favored response to the Great Recession, is more than just simple belt tightening. It's not one cut or 10, but a thousand. City and neighborhood essentials like bus service become expendable, and things that we have come to depend on as part of our daily lives are slowly erased. Those teachers and firefighters <a href="http://www.washingtonpost.com/blogs/plum-line/post/mitt-romney-we-dont-need-more-cops-firefighters-or-teachers/2012/06/08/gJQAvOgDOV_blog.html" target="_hplink">Mitt Romney doesn't want</a> to pay for? They're already part of austerity's disappeared jobs. This austerity mindset is taking hold not just in cities and states across the United States, but around the world. While conservatives have championed austerity as eat-your-peas necessity, these massive cuts often have unintended consequences.
Fire Department Cuts
<a href="http://www.huffingtonpost.com/2012/07/13/fire-department-cuts-a-thousand-cuts_n_1659671.html">CLICK HERE to read the full story.</a> "They are asking you to do more with less," Westfield, N.J., firefighters union president Mike Sawicki said. "A second-grader can figure that out. Show up with nine guys, and it is easier to save." While the number of deadly fires has declined over the last 20 years nationwide, thanks to better construction and safety techniques, fire departments are increasingly called upon to answer medical emergencies, chemical spills and more, said Garry Biese, CEO for the International Association of Fire Chiefs. Yet fire departments are going short-handed. The precipitous drop in state and local revenues caused by the Great Recession, combined with budget cuts pushed by austerity-minded politicians, has led to static or slowly dropping staffing levels across the country.
Larger Class Sizes
<a href="http://www.huffingtonpost.com/2012/07/14/larger-class-size-a-thousand-cuts_n_1659591.html">CLICK HERE to read the full story.</a> When Shania started third grade at P.S. 148 last fall, she was thrilled to be back at the Queens public school. An outgoing eight-year-old, she said she was happy to be among her friends again, and she had loved her class the previous year. Her second-grade teacher would take the time to explain tricky topics like addition and subtraction one-on-one. She had even been named "student of the month." But since 2007, as the economy has tanked and expenses for public schools have risen, New York City has made principals cut budgets by 13.7 percent. When budgets are cut, teachers are fired and others aren't replaced -- including at P.S. 148, which has lost at least $600,000 and eight teachers since 2010. When teachers are lost, class sizes balloon. Shania had 31 classmates this past school year, compared to 20 the year before.
'The Big Problem For Me Is Fear'
<a href="http://www.huffingtonpost.com/2012/07/15/austerity-measures-uk-a-thousand-cuts_n_1670711.html" target="_hplink">CLICK HERE for the full story.</a> Since birth, Lisa Egan, 33, has dealt with a rare genetic disorder called osteogenesis imperfecta, also known as brittle bone disease. The condition has caused more than 60 fractures in Egan's lifetime, including five separate breaks in 2011. "I once broke my back sleeping in an awkward position," she said. Because her disease is "wearing out her joints," doctors told Egan to use a wheelchair. "I can walk a very short distance and very slowly," said Egan, who lives in Camden, North London. "But sometimes things happen, such as my knee dislocates or I will tear a tendon out of a metatarsal and pull the end of the bone off with it. ... So I use a wheelchair most of the time." Despite her condition, Egan said she does not like to be seen as "vulnerable." Intelligent and articulate, she has written extensively on disability and politics, and has even tried a stint at stand-up comedy. As one of nearly 500,000 people in the United Kingdom who rely on welfare benefits, however, Egan now experiences fear daily: fear for her future, fear for her ability to live independently, even fear for her life.
Public Transit Crisis
<a href="http://www.huffingtonpost.com/2012/07/16/detroit-bus-cuts-a-thousand-cuts_n_1647867.html" target="_hplink">CLICK HERE to read the full story.</a> Waits have been getting longer for many of the roughly 107,000 to 117,000 daily passengers who depend on Detroit's bus fleet. The city has lost about half of its bus service since 2005, according to Transportation Riders United, a rider advocacy group. Under the Detroit Department of Transportation's new "415" plan, the city has increased service along its four busiest routes, with buses now running every 15 minutes, but the new schedule necessitated tradeoffs elsewhere. In March, the department, whose management had recently been privatized by the city, shortened hours on more than 30 routes and discontinued all service between 1 a.m. and 4 a.m. The changes, which the city anticipates will save $40 million a year, have forced an estimated 3,200 nighttime travelers to come up with alternative plans for getting around town and left others waiting longer on the side of the road. "I'm hurting. A lot of times they don't come around, and when they do, they pass you by," said George Jones, 57.
Fewer Food Inspectors
<a href="http://www.huffingtonpost.com/2012/07/17/canada-food-safety-a-thousand-cuts_n_1664579.html" target="_hplink">CLICK HERE to read the full story.</a> Frances Clark's last moments were not peaceful. Flu-like symptoms and seizures wracked her body. Her breathing deteriorated. At the end, she was "gasping, like a fish out of water," her daughter recalled later in court documents. The 89-year-old woman died on Aug. 25, 2008, the first victim of a listeriosis outbreak that killed 23 people, sickened thousands more and triggered the biggest food recall in Canadian history. A government investigation determined the cause of the outbreak: tainted meat from processing giant Maple Leaf Foods. The company apologized to the victims and settled a number of lawsuits, including one brought by Clark's family, for CAD$27 million. Following the scandal, the federal government introduced significant changes to its meat inspection program, including nearly doubling the number of inspectors from 225 to 400. But now, the government has slashed the budget for the Canadian Food Inspection Agency, the federal department responsible for food safety, by $56 million over the next three years.
Affordable Housing Gap
<a href="http://www.huffingtonpost.com/2012/07/18/affordable-housing-san-francisco-a-thousand-cuts_n_1666760.html" target="_hplink">CLICK HERE to read the full story.</a> Roman Quinn said getting clean would have been nearly impossible if he were still living on the streets. But his struggle to find a place to live proved nearly as difficult as his struggle to find sobriety. San Francisco has nonprofit groups and other programs in place to help the city's most vulnerable residents -- people like Quinn and, increasingly, families tossed out of their homes due to the recession -- find housing. In recent months, however, that system has been greatly strained. Federal housing grants and tax credit programs have decreased drastically. Last year alone, the U.S. Department of Housing and Urban Development's HOME Investment Partnerships Program, which doles out grants to municipalities for things like affordable housing construction and down payment assistance, saw its budget slashed by almost 38 percent. And changes at the state level last year cost the city about $50 million worth of tax revenue that had gone toward affordable housing. Meanwhile, the flood of individuals who have lost their jobs and homes in recent years has swelled the demand for affordable housing. It became so bad that the city's public housing authority closed the waiting list to new applicants in 2010. The list has yet to reopen. Without new sources of funding, success stories, even ones as tenuous as Quinn's, will be increasingly uncommon.
New Industry Struggles
<a href="http://www.huffingtonpost.com/2012/07/19/austerity-measures-france-a-thousand-cuts_n_1679428.html" target="_hplink">CLICK HERE to read the full story.</a> While austerity measures remain comparatively limited in France, one field has suffered considerably: renewable energy, particularly solar photovoltaic systems. Over the past few years, nearly half the jobs in the sector, a total of 12,000, have been disappeared. According to the Syndicat des Energies Renouvelables, the renewable-energy trade union, nearly one-third of those jobs vanished in 2011. Entrepreneurs like Kilian Heim, who had gone out to conquer this new market, are now restarting from zero.
Austerity's Big Winners
<a href="http://www.huffingtonpost.com/2012/07/23/austerity-wall-street_n_1690838.html" target="_hplink">CLICK HERE to read the full story.</a> The austerity game also has winners. Cutting or eliminating government programs that benefit the less advantaged has long been an ideological goal of conservatives. Doing so also generates a tidy windfall for the corporate class, as government services are privatized and savings from austerity pay for tax cuts for the wealthiest citizens.
How You Can Help
As readers of The Huffington Post, you can take action to help those affected by these austerity measures. <a href="http://www.huffingtonpost.com/2012/07/13/austerity-cuts-how-you-can-help_n_1669072.html" target="_hplink">Click here for information on what you can do.</a>