The 2000 Federal Budget: Retrospect and Prospect

The 2000 Federal Budget: Retrospect and Prospect
Paul A.R. Hobson and Thomas A. Wilson (eds.), 2001 (Paper ISBN: 0-88911-816-7 $18.95) (Cloth ISBN: 0-88911-814-0 $49.95)

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Acknowledgement . . . vii

. . .


Session I: The 2000 Federal Budget: Impications for Canadian Federalism
The Social Union Framework Agreement
and the Federal Budgetary Process
Harvey Lazar

. . .


Taxation, Fiscal Federalism and the 2000 Federal
and Provincial Budgets
Thomas J. Courchene

. . .


Session II: The Budget and its Macroeconomic Effects
Macroeconomic Effects of Budget 2000
Thomas A. Wilson, Peter Dungan and Steve Murphy

. . .

Macroeconomic Effects of the 2000 Federal Budget
Rick Egelton

. . .

Macroeconomic Forecasts and the Budget
Gregor Smith
. . . 78
Session III: The Taxation Dimension
Counting Chickens and Unhatched Eggs:
The Post-Budget Outlook for Canadian Taxes
William B.P. Robson

. . .

How Do Recent Tax Reforms Affect the Behaviour
and Welfare of Families?
Michael Smart

. . .

Tax Changes in the 2000 Federal Budget
Robin Boadway

. . .

Session IV: The Expenditure Dimension
Federal Expenditures in Canada:
The Millennial Vision and its Tensions
Lars Osberg

. . .

Federal Budget 2000: The Expenditure Dimension
from a Provincial Perspective
Lise Bastarache

. . .

Session V: The Social Policy Dimension
Budget 2000: A Children's Budget?
Frances Woolley

. . .

Do We Know Where We Are Going?
Keith Banting

. . .

Session VI: Assessment and Perspectives
Paul Martin's Tax Revolt
Jim Stanford

. . .

Fiscal Stabilization and the Allocation of Fiscal
Dividend: An Assessment
Pierre Fortin

. . .

Session VII: Budgeting in the New Millennium
Some Reflections on the Budget Process and the
Fiscal Issues Confronting Canada
Jack M. Mintz

. . .


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The John Deutsch Institute for the Study of Economic Policy (JDI) was fortunate to once again team up with the University of Toronto's Institute for Policy Analysis (IPA) in sponsoring this conference volume, The 2000 Federal Budget: Retrospect and Prospect.

The JDI has, since its inception, provided periodic assessments and evaluations of federal budgets. The 2000 federal budget was, of course, special as it marked the transition from the first to the second millennium. It was also special in that it was the first budget to deal with large potential future surpluses. Moreover, following previous budgets directed at planned deficit reduction and control, the focus at this forum, as in the recent public debate, shifted to the question of how to allocate the potential surplus.

The budget forum, held on March 30-31, 2000 at Queen's University, was a project in which David Smith took a personal interest during his term as Acting Director of the JDI. Typically, David was particularly interested in continuing the collaboration between JDI and IPA in hosting the forum and publishing its proceedings. He opened the forum and chaired its first session. His untimely death in May following the forum underscored for both of us the privilege of working with him to promote a tradition of strong policy analysis in Canada, surely part of his legacy to Canadian society.

It was a great pleasure to welcome Mrs. Stephanie Deutsch as an honorary participant at the conference. It was Harvey Lazar who noted that all the panellists in the first session had at some point worked at the Economic Council of Canada, once chaired by John Deutsch.

Session I: The 2000 Federal Budget: Implications for Canadian Federalism

The first session was a panel discussion, chaired by David Smith (Queen's). Panellists were Pierre Fortin (UQAM), Harvey Lazar (Queen's) and Tom Courchene (Queen's). Fortin focused his remarks on the interaction of fiscal and monetary policies under the inflation-targeting regime; his remarks are expanded in his presentation in Session VI. Lazar focused on the Social Union Framework Agreement (SUFA) between Ottawa and the provinces and its implications for the federal budgetary process. His argument was that there is a potential tension between the SUFA and the federal budgetary process - that the joint planning provisions of the SUFA will complicate the federal budget-making process, or that this process will undermine the joint planning provisions of the SUFA, or both. Courchene reviewed the provinces' reactions to federal tax cuts in light of provisions allowing the provinces to move to a tax on income (TONI) system rather than the tax-on-tax system.

Session II: The Budget and Its Macroeconomic Effects

The second session continued the tradition of JDI budget forums of looking at the macroeconomic effects of the budget. Chaired by Allan Gregory (Queen's), presentations were made by Thomas Wilson, Peter Dungan and Steve Murphy (IPA and University of Toronto) and Rick Egelton (Bank of Montreal). Gregor Smith (Queen's) served as commentator. Wilson, Dungan and Murphy underscored the point that much of what would traditionally have been included in the budget now occurs outside the budget process. They provided two sets of estimates, one for measures contained within the budget and one for what they term the "augmented budget", which combines measures contained within the budget itself with tax and spending initiatives implemented prior to the budget as well as prospective Employment Insurance (EI) payroll tax cuts over the next three years. They argued that the budget provides a very modest stimulus to real output under the inflation-targeting regime. They also argued that, over the medium term, the proposed tax changes are conducive to efficiency and economic growth. Egelton argued that while the federal budget provides some fiscal stimulus over the next two years, its impact on economic growth will be minimal in light of an anticipated tighter, offsetting monetary stance by the Bank of Canada. Smith explored the potential impacts of a decision to choose a faster pace of debt reduction, the changing composition of federal spending, and the role and quality of private sector forecasts (including those from IPA!) as a key element of the budgetary process.

Session III: The Taxation Dimension

The third session focused on the taxation dimension of the budget. Chaired by Ian Cromb (Queen's), presentations were made by Bill Robson (C.D. Howe Institute), Michael Smart (University of Toronto) and Robin Boadway (Queen's). Robson's presentation highlighted the time-release nature of the tax reductions announced in the budget. He argued that, in the course of the next couple of fiscal years, spending hikes dominate tax reductions, making lower marginal rates and greater fairness elusive policy goals. Smart explored the effect of tax reforms contained in the budget on the behaviour and welfare of families. He emphasized the importance of understanding the impact on economic efficiency through changes in effective marginal tax rates of measures such as changes to family benefits and the softening of foreign content restrictions for retirement savings. Boadway scrutinized the structural changes in the tax system contained in the budget against criteria for the design of a good tax system. He made a plea for increased emphasis on the use of refundable tax credits within the income tax system and for some consideration of the long-term implications of the ongoing shift of income tax room in favour of the provinces, especially in regard to the sustainability of the tax collection agreements.

Session IV: The Expenditure Dimension

The fourth session focused on the expenditure dimension of the budget. Chaired by France St-Hilaire (IRPP), presentations were made by Lars Osberg (Dalhousie) and Lise Bastarache (Royal Bank). Osberg picked up on what he perceives to be a discordance between the level and allocation of rhetorical and financial emphasis that runs through the budget. He argued that, if the budget is to lay out a plan for the new millennium, it must be both credible and sustainable, yet, in his view, there is a gulf between popular preferences (for the welfare state) and elite opinion (smaller government) which will continue to dog the budget-making process. Bastarache discussed the impact of supplements to the Canada Health and Social Transfer (CHST), including those contained in the 2000 federal budget, on the federal share in provincial revenues. She argued that federal cash transfer payments to the provinces through CHST and Equalization will continue to decline as a share of provincial revenues, notwithstanding the recent supplements. In that light, she argued that the provinces have done well to embrace TONI, since they will be forced to increasingly rely on own-source revenues for financing burgeoning social expenditures. Tom Courchene provided some remarks in the context of the information economy which are not reproduced in this volume, but see his book, A State of Minds: Toward a Human Capital Future for Canadians (Montreal: IRPP, 2001).

Session V: The Social Policy Dimension

An important aspect of the budget debate has been the future direction of social policy. Chaired by Kate Cuff (now at McMaster), presentations were made by Frances Woolley (Carleton), Michael Mendelson (Caledon Institute) and Keith Banting (Queen's). Woolley described the 2000 budget as a missed opportunity to deliver a coherent approach to family policy in Canada. She argued why a "children's budget" was wanted, needed, but not delivered. Mendelson's presentation is not reproduced in this volume, but see his Caledon Institute publication, The Payback Budget of 2000, co-authored with Ken Battle and Sherri Torjman. Banting took a broad perspective on the process of change in policy delivery over the past two decades - the reshaping of social Canada. He asked whether the myriad of incremental changes at the federal and provincial levels are adding up to a model of social policy that is internally coherent and politically sustainable and argued that we should not be sanguine if the answer is "no".

Session VI: Assessment and Perspectives

Assessments and perspectives were provided by Jim Stanford (CAW) and Pierre Fortin (UQAM), in the session ably chaired by Hugh Segal (IRPP). Fortin argued that fiscal stabilization policy is meaningless given flexible exchange rates and inflation targeting by the Bank of Canada. Rather, fiscal policy has implications for the composition of demand and output through its effect on the real rate of interest and the real exchange rate. Thus, the focus should be on the allocation of the fiscal dividend rather than on stabilization policy. In this regard, he argued, even more emphasis on debt reduction might have been appropriate. Stanford dubbed the 2000 budget the "tax cut" budget. He argued that the end result will be a lopsided society typical of the purely private economy and that the federal liberals have clearly indicated, through the 2000 budget, that this is how they want Canadian society to evolve.

Session VII: Budgeting in the New Millennium

Jack Mintz closed the forum with some remarks on the budget process and the fiscal issues confronting Canada in the new millennium. Appropriately, Mintz's remarks were completed following the October 2000 pre-election, mini-budget. While he gave high marks to the Martin budget process, he was critical of the lack of clarity and transparency (especially since the surplus is undefined), incremental decision-making, pro-cyclical rather than anti-cyclical fiscal policy, and a lack of clear fiscal objectives for planning. He called for an economic plan, complementary to the budget process. Elements of such a plan would include identifying the objects, debt reduction, a review of expenditure priorities, the need for tax reform rather than simply tax cutting, and some closure on federal-provincial fiscal relations.

Our Parting Remarks

As it turned out, the February 28, 2000 federal budget was followed by the mini-budget on October 18, 2000, which represented the Liberal economic platform in the subsequent general election. With the re-election of the Liberal government, the measures proposed in both budgets will be implemented as planned. Indeed, as of the time of writing, there is no plan for a 2001 federal budget.

We would like to express our sincere thanks to the authors and commentators for their cooperation in finalizing their papers. We would also like to thank the session chairs and participants from the floor for their contributions. It has always been the position of the JDI that it is the discussion from the floor that is central to the success of the Institute's conference activities. Marilyn Banting once again provided her editing skills in preparing this volume for publication and we thank her for a job well done. Finally, we wish to thank Sharon Sullivan for her superb work in keeping the project on track, taking care of all the administrative details, and in shepherding the authors and editors so as to bring about a most successful forum and the completion of this volume. Simply put, without Sharon there would have been no forum and no volume.

It is a pleasure for the JDI and IPA to have sponsored the forum and now to sponsor and publish this volume of retrospective and prospective assess-ments of the 2000 federal budget. We trust that it will contribute to the record of public policy development and analysis that was such an important thrust for both John Deutsch and David Smith.

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