The 2003 Federal Budget: Conflicting Tensions

The 2003 Federal Budget: Conflicting Tensions
Charles M. Beach and Thomas A. Wilson (eds.), 2004 (Paper ISBN: 0-88911-958-9 $29.95) (Cloth ISBN: 0-88911-956-2 $65.00)

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INTRODUCTION

THE MARTIN/CHRÉTIEN FISCAL LEGACY: Reflections from the Perspective of the 2003 Budget

Thomas J. Courchene, Queen's University

Introduction

It was inevitable that any assessment of the 2003 federal budget would quickly give way to an assessment of the Liberal government's decade-long fiscal legacy. In his oral remarks, Simpson referred to the 2003 budget as a fin de régime budget. Dahlby and Kesselman in their respective papers follow along this legacy approach by assessing the issue of whether the 1994-2003 Martin/Chrétien remake of Canada's tax system is adequate to twenty-first-century needs. Yalnizyan's detailed review of health-care funding casts the 2003 budget in an even longer framework (1900-2003). Harris claims that Canada's successive seven-year series of budget surpluses has led the international community to view our penchant for budget balance as a "Canadian Fiscal Value". And where the budget had a distinctive forward impact, such as the beginning of a policy to implement Kyoto, this was again viewed as a Chrétien legacy issue. Finally, and perhaps most important in terms of the specifics of the 2003 budget, it precommitted or front-loaded an enormous amount of future spending (health care, child benefits, elderly care, Kyoto, etc.). Indeed, Simpson aptly calls this aspect of the 2003 budget a "Honey, I shrunk the kids" budget since it reflected Chrétien's attempt to lengthen and broaden his policy legacy on the one hand and to ensure that the margin to manoeuvre for Prime Minister-in-waiting Paul Martin was as limited as possible.

Caught, thusly, between forces in Finance (and the PM's office as well) intent on preserving the fiscal legacy and the politics-of-succession fiscal gymnastics, it became very difficult for Finance Minister John Manley to claim much ownership for the 2003 budget. This is most unfortunate since John Manley was probably the only member of the Chrétien team that could have replaced Paul Martin in Finance with scarcely a dent in the Finance Department's fiscal credibility. Moreover, while Manley presided over Finance in the extremely uncertain post September 11, 2001 (9/11) period, Canada's economic performance, especially on the employment front, nonetheless outpaced that in the United States. Yet, the drama and expectations associated with the Liberal transition ensured that while political history will clearly give John Manley purchase on the 2003 budget, policy history will remain bound up with the theatrics of the personal legacies, past and future, of Chrétien and Martin.

In what follows, I also begin with a fin de régime approach by adding my own bit of perspective to the Chrétien Liberals' budget legacy. Then I will turn, selectively, to the various issues dealt with in both the conference and the volume, where again the perspective will, like the papers themselves, transcend the links to the 2003 budget.

More on the Fiscal Legacy

Giving Martin a Helping Hand

By way of an institutional introductory comment, this is the John Deutsch Institute's fourth budget conference and volume relating to the Chrétien era: the other JDI budget volumes relate to the 1995, 1997, and 2000 budgets respectively. To record the JDI's own fiscal legacy, the table of contents of these three previous conferences appear as the Appendix to my remarks. In this context a feat worth recording is that Thomas Wilson not only served as editor on all four budget volumes, but undertook (always with Peter Dungan, sometimes with Steve Murphy) the requisite quantitative appraisal of the respective budgets. A final opening comment is that my own expertise is such that I will not treat all sessions equally. Nonetheless, the overall collection of papers and comments is very impressive in terms of the depth and breadth of the analysis and will certainly appeal to academics, the policy community, and students of fiscal and budget matters.

The first of my perspective, or perhaps retrospective, comments is that Finance Minister Paul Martin was, initially at least, very lucky. Consider the following, all of which helped Martin tame the deficit:

. The Mulroney budgets, while never achieving budget balance themselves (although they did run operating surpluses) did soften the Canadian public for something more than incrementalism in terms of addressing the deficit.

. The Bank's shift to price stability and the Finance Department's agreement with the Bank in 1991 for an explicit target range paved the way for low and stable inflation for the entire Liberal decade (which served to lower the cost of debt-servicing).

. The fall in the dollar from its 1991 peak of 89 cents to the low 70s and later to the low 60s served to dramatically increase Canada's competitive position vis-à-vis the United States as well as Canada's tax revenues, ensuring that Martin was presiding over a strong economy.

. Even Moody's putting Canada on a "credit watch" in the first weeks of 1995 served Martin well, since he was able to lever off this to convince his fellow Liberals that fiscal restraint was the order of the day.

Later on, Martin's stellar performance arguably helped create his own good luck, as it were, but these initial bits of good fortune certainly paved the way.

Budgets and the Politics of Federalism

In his overview comments, Jeffrey Simpson directs some attention to what he calls the "politics of federalism", namely that since the federal government obtains little visibility and perhaps even less in the way of accountability for unconditional transfers to the provinces, Ottawa will push for more conditionality to be associated with future transfers. Arguably, this is what creating a separate CHT (Canada Health Transfer) and a CST (Canada Social Transfer) out of the current Canada Health and Social Transfer (CHST) is all about - to increase the "federal direction" (Simpson's term) of the transfers. In this context, I expect to see the word "additionality" become an important part of the jargon of fiscal federalism: the provinces will have to show that they are spending "additional" dollars in areas where transfers have increased. (Note that additionality may be one way around Mendelson's concern with respect to the inherent fungibility of transfer monies.) This may not work, of course; the provinces have thus far successfully ignored the conditions associated with the latest health transfer.

However, there is a much more important way for Ottawa to increase visibility and accountability, and one that is the hallmark of the Martin-Chrétien approach to fiscal federalism. This is to decrease federal transfers to the provinces while increasing federal transfers to citizens; that is, to increase direct transfers to citizens at the expense of indirect transfers through the provinces. The 1995 budget cuts to the CHST and then the later federal monies devoted to research chairs, Millennium Scholarships, and the Canada Child Tax Benefit (CCTB) and National Child Benefit (NCB) supplement are ample evidence of this trend to bypass the provinces. On a related note, it is commonplace for social activists to make the point that the Canada Assistance Plan (CAP) was a major victim of the creation of the CHST. In some ways this was certainly true, 50% welfare-sharing played an important stabilizing role for provinces hit by a negative shock, a role that has now disappeared. However, these same social advocates tend not to recognize the very substantial increases in the CCTB and NCB as more than a quid pro quo for the disappearance of CAP.

Budget Balance as a Canadian Value

Rick Harris' observation that, in foreign capitals, budget balance is coming to be viewed as a Canadian fiscal value is one of those insights that will immediately become part of our fiscal rhetoric. Bravo! Harris then raises the question of whether budget-balance targeting is an appropriate longer-term goal since it could well imply pro-cyclical policy; that is, raising taxes or cutting expenditures in a recession in order to stem a potential deficit. Obviously, one cannot rule out this possibility. But let me offer two possible counters to this. First, arguably Canada's most effective experience ever with stabilization policy occurred in the context of the millennium slowdown. As a result of measures in the February 2000 federal budget and the October 2000 economic statement, Canada's largest tax cut ($58 billion over five years) began to take effect on January 1, 2001, as did a cumulative $25 billion increase in the CHST. This timing coincided with the cyclical downturn and was in place for the dastardly deeds of 9/11. While this may be a one-off event and, therefore, not a meaningful answer to the Harris concern, it is arguably part of the reason why Canada has skated through this downturn more easily than have the Americans.

Perhaps the second counter is, however, that there is nothing sacrosanct about exact budget balance (i.e., a zero deficit). One can just as easily imagine balancing the budget over the cycle at a surplus of, say, $5 billion. In boom years, the actual surplus may shoot to $10 billion, and in recessions it may fall close to zero. The $10 billion swing in this example is actually less than the actual swing in Canada's surpluses (the peak was a surplus of over $17 billion in fiscal 2000/01). The point is that one can target for a given (positive) budget balance and still leave plenty of room for the operation of both discretionary and automatic stabilization policy, all the while maintaining surpluses as a Canadian fiscal value. While this is clear analytically, such a policy could run into trouble politically.

A Perspective on the Quantitative Budget Assessments

The JDI budget tradition has always been to devote a panel of the conference and volume to assessing the quantitative impacts of the budget. This has become a progressively less transparent exercise over the years. First of all, increasingly fiscal year t+1 is being influenced by budgets other than the one tabled in fiscal year t. For example, over the next fiscal year, some of the tax cuts legislated in the 2000 budget will be implemented, as will some of the pre-committed expenditures of earlier budgets (health transfers, Millennium Scholarships). Second, some of the recently legislated transfers to the provinces are in the nature of "rainy-day" funds - they can be drawn down by the provinces at any time over, say, a two or three year period. In any event, the result is that focus on the quantitative impact of year t's budget on the economy in year t+1 is becoming even less interesting. This is so because the answer to this question may be quite at variance with an equally, if not more, important question: What is the impact on the economy in year t+1 as a result of the changes in fiscal parameters from year t to year t+1? These changes in fiscal parameters from year t to year t+1 will incorporate the changes from this year's budgets as well as all relevant past budgets. The results of these quite different exercises could point in different directions, for example, one could be expansionary and the other contractionary. It is presumably the case that the fiscal authorities are fully aware of the influence that past budgets will have on the economy in the year t+1. This being the case, the budget stance for year t+1 will be designed to take these past budgets into account. Hence, my recommendation is that in any future JDI budget conferences, the quantitative budget assessment undertake forecasts of both these influences.

Beyond this, there is the reality that once monetary policy and inflation targeting are brought into the picture, expansionary (contractionary) fiscal policy will not boost (reduce) economic growth because the fiscal impact will be offset by tighter (looser) monetary conditions.

In light of all this, the important contributions of the Wilson-Dungan/ Egelton/Fortin panel is the focus on composition of output as a result of the interplay of the macro levers. Under the assumption that fiscal policy and output were already on track to generate inflation consistent with the Bank's target, Egelton's conclusion is instructive:

"If fiscal policy turns expansionary [as it has, T.J.C.], the Bank will increase interest rates by an amount sufficient to exactly offset the stimulus to economic growth from fiscal policy. Thus, expansionary fiscal policy will have no impact on growth but will serve to increase interest rates and push-up the value of the Canadian dollar as a result of widening interest rate differentials."

A forecast more accurate than most!

Accountability and Transparency

In his paper "Full Accrual Accounting", Wiersema notes that the move to full accrual in the 2003 federal budget is viewed by some as "the biggest change in accounting for the federal government since Confederation". I commend the editors for scheduling a panel on this general issue. Complementing Wiersema's analytical paper is McCracken's valuable road map for how to improve transparency across a wide swath of policy areas and jurisdictions. And Alan Macnaughton's comment, drawn from recent earnings-management experiences in the private sector where accrual accounting is the rule, provides a timely reminder that the public sector equivalent of earnings management (e.g., deficit management) remains possible, which means that the Auditor General "has much work to do in ensuring that the introduction of full accrual accounting actually improves financial disclosure".

Indeed, the fact that fiscal year 2002/03 was selected as the year for introducing full accrual is readily explainable. Table 8.2 of The Budget Plan: 2003 reveals that the impact of incorporating full accrual accounting adds $-0.7 billion to the surplus in 2001/02, $3.1 billion in 2002/03, $0.7 billion in 2003/04, and $0.9 billion in 2004/05. Small wonder that fiscal year 2002/03 was chosen to inaugurate the move to full accrual accounting. Indeed, given the pre-budget fiscal-restraint rhetoric, I was surprised that as part of the February 5, 2003 health accord, Ottawa was able to provide an additional immediate (i.e., fiscal year 2002/03) transfer of $2.5 billion to the provinces. What only Finance and the federal government knew was that their decision to shift to full accrual accounting in 2002/03 would generate an additional surplus that would comfortably finance this $2.5 billion transfer to the provinces.

One of the major accountability concerns of the Martin era at Finance related to what might be termed "deficit management", arguably the public sector equivalent to Macnaughton's earnings management in the private sector, as already noted. Heading up the list of issues here is the growing role of foundations, namely the use of third-party foundations that would receive budget monies in year t, but spent in future years. These are truly creative instruments that manage deficits by transferring funds to these foundations in budget years with large surpluses (often embarrassingly large in light of the forecast surplus). This decreases the surplus in these budget years and allows spending in later years when fiscal positions may be tight. As Weirsema notes:

"Since 1997, the government has transferred some $7.5 billion to 10 foundations ... The largest of these are the Canada Foundation for Innovation and the Millennium Scholarship Fund ... However, they haven't actually been spent for their ultimate intended purpose. [The Office of the Auditor General] found that, at March 31, 2002, only a tiny fraction of the $7.5 billion had been put to its ultimate intended use. The rest was sitting in accounts of the foundations, gaining interest. Very little had found its way to innovators and students."

Accordingly, Weirsema, and McCracken, focus on a variety of ways that these transfers to foundations can be more transparent and accountable.

At a more general level, Paul Martin's approach to budgeting certainly increased the transparency of the process - reducing the legislative period to the current fiscal year and the following two years (rather than the previous five-year projections): reliance on private-sector forecasts for variables such as gross domestic product (GDP), interest rates, inflation, etc.; adopting numerical deficit targets; and adopting explicit contingency measures to ensure "prudent" outcomes. Thanks to these measures (and to the factors alluded to earlier), almost immediately the budgetary deficit targets became credible - the financial community fully believed that Martin would achieve his deficit targets "come hell or high water" (as he earlier proclaimed). Indeed, in the event Martin exceeded his deficit targets by so much that, ironically, his projections became meaningless (except that it was certain that he would meet the deficit targets). Normally, Martin and Finance would have been skewered for consistently "low-balling revenues" so as to generate surpluses well above forecast levels. However, here is where his transparent process paid dividends: namely that the source of the problem relating to underestimating the eventual surplus did not lie in the Department of Finance. Rather, the problem lay with the fact that the private-sector forecasts consistently under-estimated key variables such as nominal and real GDP growth. In turn, this was because these private-sector estimates for Canadian GDP, etc. were driven off US forecasters' projections of comparable US variables. Thus, it was because the American forecasters consistently under-estimated the strength of the US economic boom that Canadian budget forecasts also under-estimated the eventual surpluses. While there was much concern (even from the ranks of the Chrétien Liberals) about this overshooting, Martin and Finance were off the hook, as it were, because of the transparent nature of the budgetary process itself.

By way of a final comment, not all of Martin's initiatives would pass the accountability and transparency test. The obvious exemplar here is the so-called Unemployment Insurance (UI) (or EI) stabilization fund. With the economy picking up steam in the mid-1990s, Employment Insurance (EI) premiums were running roughly $6 billion ahead of EI payments to the unemployed. As part of his victory over Lloyd Axworthy and the social policy review process (see Greenspon and Wilson-Smith, 1996), Martin effectively took ownership of EI revenues. Faced with the urgency of addressing the deficit issue, he pocketed roughly $5 billion of these excess premiums and directed them toward the deficit reduction exercise. This has continued each and every year since the 1995 budget! To be sure, some pressures have developed for annual EI premium decreases, but these tended not to match the EI revenue increase from an ever-expanding employment base. Martin's rationale was that he had to build up an EI stabilization fund in order to have sufficient funds to finance the possibility of another EI deficit (payments exceeding premiums) on the scale that appeared in the early 1990s recession. But this was a virtual fund only. The excess EI premiums went directly into consolidated revenues. (I note in passing that at least one paper in this volume refers to the existence of the EI "fund", which is evidence of the utter non-transparency of this initiative.)

The further problem with all of this is that any excess premiums legally, were the "property" of the EI program, not of Finance. Hence, in my view, this was, and is, a misdirection of funds. What Martin ought to have done if he wanted these funds was to enact legislation to convert these excess premiums into a federal payroll tax. But for this Martin would have to assume accountability and make his actions transparent. Where was the Auditor General in all of this? Note that these issues were addressed earlier in JDI's 1997 budget volume by Dale Orr (see Appendix).

A Tax System for Century 21

Bev Dahlby's contribution, "The Chrétien Government's Legacy: A Tax System for the 21st Century?" is a veritable tour de force that is sure to find its way onto public finance reading lists. And the contribution is made even more valuable given that it is supplemented by Kesselman's constructive and insightful assessment. Since there is no way that I could possibly do justice to these papers in the space available, I shall focus rather arbitrarily on those features that struck me as either novel or particularly policy relevant.

Dahlby's reflections on the social insurance system are a good place to begin. As a result of the Canada/Quebec Pension Plans (CPP/QPP) premium increase from 5.85% in 1997 to 9.9% in 2003, contributions have risen from $11.7 billion in 1994 to nearly $30 billion in 2002. Two implications merit highlight. First, the maximum contribution for employees has increased from $806 in 1996 to $1,673 in 2002, the result of which Dahlby notes is to largely offset the other tax reductions (e.g., personal income tax [PIT] reductions) for low income individuals, especially single individuals. His second concern is that for the golden agers, their Guaranteed Income Supplement (GIS) is offset by 50% for any other income (including CPP/QPP payments) which, in turn, means that this doubling of premiums will not be reflected in their after-tax /after-GIS incomes when they retire. Dahlby's preference would have been to have smaller premium increases in the context of raising the retirement age by a year or two. Even the "progressive" Swedes have raised their retirement age for receipt of retirement benefits.

I would also add that at 9.9%, CPP/QPP premiums will begin to crowd out private-sector/occupational pension plans, which is another argument for supporting Dahlby's preferences for trading off some of the premium increase for an increase in the retirement age. Indeed, since much of this premium hike is designed to address the "fixed" or "sunk" costs that have arisen because the soon-to-retire baby boomers have not paid their fair share of their future pensions, the correct approach in any event is to finance this sunk cost out of general revenues. In an earlier context, I have addressed all of these issues under the admittedly provocative, but arguably appropriate title, "Generation X vs. Generation XS" (Courchene, 1997).

Among Dahlby's comments related to EI premiums is his view that true reform of EI is likely impossible because Canadians refuse to accept the principle of experience rating. I am not sure that I agree with this. I fear that experience rating would do precious little to address what ails EI. For example, experience rating in the fishing industry would clobber year-round fish farming, with attendant pressure to apply experience rating beneath the industry level, indeed eventually at the firm level with the regulatory nightmare that this would trigger. Actually, the real problem relates to the fact that short-term work attachment can lead to lengthy benefit periods. Not surprisingly, this feature is taken full advantage of by the seasonal industries: fishing, construction, forestry. It is the lack of the "insurance" feature in EI that leads to its overuse by certain industries. Were one to ensure that access to one week of benefits would require at least one week (and preferably two weeks) of work, then my guess is that most of the observed overuse by selected industries would vanish and, therefore, the rationale for experience rating would be ameliorated considerably.

Dahlby rightly labels the CCTB (and the associated NCB) as one of the most important tax changes of the Chrétien era since it reduces the incentive for poor families to move from welfare to work. However, the tax-back rates are such that the combined federal-provincial marginal tax rates for families with two children can exceed 60% in the $30,000 income range. Dahlby casts the dilemma as follows:

"Basically, a tax-transfer system that achieves a significant amount of redistribution to lower income households can either impose high marginal tax rates on low income households through "targeted" benefits with high clawback rates or [impose] high marginal tax rates on high income households that finance "universal" benefits. The optimal tax rate structure depends on the responsiveness of earnings to marginal and average tax rates at different income levels."

But there may be alternative approaches here. Kesselman, for example, recommends that in-kind subsidies might be one important and appropriate part of a solution - for example, vouchers for daycare. Now that the tax system has been brought into the computer age, could one not impose a top marginal tax rate, say 40%, on a family until any and all tax-backs are achieved, at which time the family would fall into line with the regular tax system. Admittedly, 40% may not be the appropriate rate, but the idea is that one does not allow peaks to 60% for lower income levels. Rather, one extends the tax-back rates further along the income grid. Phrased differently, one establishes a maximum all-in tax-back rate that applies until the family breaks even with the system.

My final reference to Dahlby relates to capital taxes and the corporate sector, namely his concern that the efficiency gains arising because the goods and services tax (GST) does not tax intermediate inputs is being eroded by the reliance, especially at the provincial level, on capital taxes. As a result, taxes on corporations are not as low as one would presume just by looking at the corporate income tax rates. All of this appears in the context of Dahlby expressing relief that Ottawa is finally phasing out its capital taxes. He might have added that in addition to the provinces following suit, they should also convert their provincial sales tax (PST) to a GST (i.e., the six provinces who have not done so).

The reference to the GST provides a convenient bridge to Kesselman's thoughtful assessment of the Dahlby paper. From my perspective his most insightful comment is that, in the context of a Canada-US common market, the GST might become problematical.

"The open borders of a customs union would yield major benefits to the Canadian economy through lowered trading costs and increased efficiency and competitiveness. However, this prospect would be thwarted by Canada's existing high indirect consumption tax rates, which require border controls to enforce.

Sales tax rates are only about half as high in most of the United States, whereas 45 states impose a retail sales tax but where there is no federal counterpart to the Canadian GST. To overcome this obstacle would require eliminating or changing the format of either the federal or provincial sales taxes in Canada. Changing the GST to a more direct form would raise the tax-paid price of goods and services produced in Canada, but the exchange rate would adjust to restore the nation's international trade competitiveness."

The reference to a "more direct form" for sales taxes would include the business transfer tax and the direct consumption tax both of which deserve more attention than they heretofore have received, especially if Canada and the United States move in the direction of a customs union.

The 2003 budget also announced that the federal government will look into the possibility of introducing tax-prepaid savings plans (TPSPs) in Canada. These are after-tax deposits that then earn interest tax free and are nontaxable when withdrawn. In a 2001 C.D. Howe publication, Kesselman and Poschmann (2001) proposed this option for Canada and then elaborated on the advantages of these TPSPs relative to RRSPs (registered retirement savings plans). Kesselman is unduly modest about Finance's decision to devote further study to his proposal, but Dahlby appropriately sings its praises.

Health Care

Armine Yalnizyan's paper, "The Health Care Budget: Did It Resolve the 'Crisis'?" will also end up on reading lists in a variety of disciplines - economics, political science, health policy, public administration, etc. It is a nice combination of theory and practice that traces some key analytical features through the 1995 CHST cuts and then through the two federal-provincial-territorial accords (September 2000 and February 2003) that returned some of these monies to the provinces. To have all of this in one place is a valuable service to students and professionals alike.

Among the many analytical points Yalnizyan makes is that the federal cuts to CHST transfers over the last half of the 1990s did not really reduce provincial expenditures on health care since "cost containment is taking place in other areas of government expenditures", with the result that "health care is taking a bigger bite out of provincial expenditure with every passing year" (with Ontario leading the way with health-care spending now in 2001-02 at 44% of provincial spending). She goes on to argue that the first of the CHST cash infusions (September 2000), although nominally a health-care deal, was really an unconditional cash transfer, "making amends for the hard years of the 1990s". Arguably, this was also the case for the $2.5 billion cash component for fiscal year 2002/03 that was part of the February 5, 2003 health accord (since the fiscal year was almost over). Much of the remaining $30 billion or so in the 2003 agreement was intended to be more "transformative" in nature, following along the lines of Romanow and Kirby. However, I share with Yalnizyan the concern that these new monies are unlikely to buy much reform. One reason is that about 80% of the cost of the roughly $75 billion in health-care spending relates to various labour inputs. Much of the new money will simply go to maintaining the supply of qualified personnel, given that up to half of these health professionals will retire within the time frame of the accord. A second reason why these monies may not buy transformation is that the provinces remain unsatisfied with Ottawa's share of health-care funding. Yalnizyan notes that Ottawa's share of provincial health spending will rise to nearly 20% over the next year or two, but then fall back to 18%, whereas the appropriate federal share should be 25%. Elsewhere, I have argued that the provinces are insisting on Ottawa abiding by the "golden rule" of fiscal federalism: if you won't supply the gold, you can't make the rules. This being the case, the provinces are not likely to embark on major transformation without more certainty and sustainability to, let alone a more appropriate share for, Ottawa's financial commitment.

In terms of issues that will likely emerge over the next few years, one that Yalnizyan highlights is the Canada Health Act (CHA) principle of public administration. My preference here (Courchene, 2003) would be to support the Kirby view that the public administration principle in the CHA refers only to how the health-care insurance plans are administered, and not to who actually provides the services. In other words, there will be a single payer (government) who should be agnostic about whether health-services providers are government-owned, not-for-profit, or for-profit enterprises.

Paul Boothe, in his discussion of the Yalnizyan paper, focuses most of his comments on financial sustainability. While the feds and the provinces are fighting over the appropriate shares, the reality is that health costs are rising faster than the revenues of all governments - "it seems that Canadians and their political leaders are not yet ready to face up to the fact that "free on demand" health care can never be affordable in a world of rapid technological change and rising public expectations and that more radical reforms will be needed to preserve our equity-based, single-payer health system". Readers wishing to find out in more detail what Boothe has in mind can consult his recent paper with Carson (2003), What Happened to Health Care Reform?

The Social Dimension

Frances Woolley's "Linking Economic and Social Policy: To Benefit All Canadians?" addresses in some detail the specific social policy provisions contained in the 2003 budget. As such, these program descriptions do not lend themselves easily to analytical reflections. However, in terms of the economic and social policy linkages that Woolley attempts to draw, I think that they are related, and more important, linkages that have been characteristic of the Martin budgets. The first is that Finance has taken over not only the funding for social policy but, arguably, the design as well. This began, of course, with the triumph, prior to the 1995 budget, of Martin and Finance over Lloyd Axworthy and Human Resources Development Canada. Henceforth, Martin largely called the social policy shots (and even took control of the EI premiums, as noted above). Once the deficit was tamed, the linkage began to unravel a bit, especially with respect to the health funding envelope. It will be interesting to see if the 2003 budget proposal for splitting the CHST into the CHT and the CST will be accompanied by a further loosening of the grip by Finance over these areas.

The second linkage is that in a progressively advancing information era where knowledge is increasingly at the cutting edge of competitiveness, social policy (in its knowledge or human-capital development dimension) is rather indistinguishable in its impact from old style economic policy. Not only was Martin fully aware of this, but he forged the way for Ottawa and the Department of Finance to make important federal inroads into these areas that, to a large degree, fall under provincial jurisdiction: Millennium Scholarships, Canada Research Chairs, etc.

With Martin as prime minister, both of these linkages will presumably continue, but the interesting question is whether they will continue to be coordinated/orchestrated by Finance or whether the oversight will come directly from the Office of the Prime Minister.

Michael Mendelson's focus is on the implications of splitting the CHST into a separate health and social transfer (CHT and CST). His answer is two-fold. First, from a fiscal objective, since the provinces have sufficient access to revenues (which preludes the existence of a fiscal imbalance between the two levels of government), the real fiscal issue is that between provinces. And for this one would prefer an equalization-type program than a CHST-type. Presumably, this is especially the case, given that all the recent infusions to the CHST have been equal per capita transfers, eroding the erstwhile degree of equalization embedded in CAP and Established Programs Financing. The part of this that is not persuasive to me is the suggestion that there is no fiscal imbalance between the two levels of government. There are competitive limits to how high our tax rates can be on our mobile factors. For many of the shared taxes, Ottawa got there first, so that there is no competitive room for the provinces to raise marginal rates, even if they have constitutional powers to do so.

Mendelson's second point is that, from a programmatic vantage point, the movement toward a CHT and a CST will only make a real difference if these transfers become conditional (or perhaps "additional" as noted in the introductory paragraph). I guess I would add that conditionality is likely only if Ottawa agrees to commit itself to paying 25% of health costs in terms of a case transfer. But I have already made this point in a previous context.

Kyoto

When it comes to the environment, I am definitely a consumer of information, not a producer. Accordingly, I benefited substantially from the descriptive and analytical contributions on the Kyoto Protocol by Ross McKitrick and Christopher Green. McKitrick begins with what turns out to have been a correct presumption, namely that Kyoto would fail because the Russians would not ratify it in part because the withdrawal of the United States from the Protocol meant that the potential value of Russia's tradeable emission permits would now be worth less. This is just as well, given his conclusion with respect to both the 2002 Climate Change Plan and the environmental provisions in the 2003 budget:

"In sum, it is hard to see any evidence that actually implementing the November 2002 Climate Change Plan in the next few years was seriously in mind when this [2003] budget was written. This would not be surprising since the November 2002 plan cannot be taken seriously. It is a hodgepodge of comically bad ideas, and the lack of any specific cost estimates cannot disguise the fact that it would be ruinously expensive while at the same time accomplishing no significant public good."

Chris Green's assessment is even more critical - Canada's environment policy is launched along the wrong trajectory:

"If the federal government really wants to make useful investments on the climate change front, it would do better to make investments that could really make a difference, rather than use those funds in a scattershot and eventually futile attempt to achieve essentially meaningless GHC (greenhouse gases) emission targets."

By way of elaboration:

"After all, what affects climate is not annual emissions (a flow), but the global atmospheric concentration of GHGs (a stock). The relevant question is what will it take to stabilize the atmospheric concentration of GHGs at a level that avoids a "dangerous interference" with climate. Contrary to popular belief, including that of many climate policymakers, the facile view ... that a combination of energy efficiency improvements and renewable energies are capable of achieving stabilization, has been shown to be fundamentally flawed."

Toward this end, Green suggests three possible projects that could be used in Canada and elsewhere to help stabilize the stock of GHGs: carbon capture and sequestration, nuclear fusion, and nuclear-generated electrolytic hydrogen.

The Chrétien Budget Legacy and the Provinces

I want to conclude with a provincial perspective of the fiscal legacy of the Chrétien Liberals, drawing in part from my earlier assessment (2002). The starting point is two-fold. First, from the vantage point of 1995, there was no way for Ottawa to move to a zero deficit without, initially at least, shifting much of the existing federal deficit to the provinces. Second, and increasingly important, what sells electorally to Canadians are citizen-related issues: health, education, income distribution, child poverty, etc. Since these areas are largely under the jurisdiction of the provinces, Ottawa has to find ways to "invade" provincial jurisdiction. The CHST cuts announced in the 1995 budget were the key to solving both of these problems. The decrease in cash transfers from roughly $17 billion to $11 billion created enormous damage to provincial finances. To be sure, the strength of the ongoing boom allowed the provinces to accommodate these cuts on a temporary basis. (As an important aside, while Ottawa has restored some of these transfers, the reality is that the 2003 budget forecasts for 2007/08 indicate that federal cash and tax transfers will still account for a smaller level of GDP than they did in 1995. On the other hand, health expenditures have grown much faster than GDP). However, part of the way that the provinces managed to maintain (indeed increase) expenditures on health was to starve virtually every other provincial policy area. As a result, citizens became very receptive to the types of policies that have been the hallmark of the Martin budgets - policies that deal directly with citizens and bypass the provinces - Millennium Scholarships, CCTB and NCB, research chairs, homelessness. In response to mounting provincial pressures for redressing the resulting fiscal imbalance, Ottawa is finding new ways to justify maintaining its current revenue share: sharing gasoline taxes with the cities, expanding the health-care envelope, increased defence and aid spending, etc.

Hence, the provinces are facing deteriorating finances (except for Alberta) and witnessing a federal end run of their spending responsibilities, an end run that appears to have the support of the majority of Canadians. So far, this bit of fiscal brinkmanship has paid off handsomely for the federal government. One can confidently predict that the provinces will not take all this without protest. The federal-provincial fiscal tug of war will soon be again afoot. This may not be news, but it's certainly Canadian, eh?

References

Boothe, P. and M. Carson (2003), What Happened to Health Care Reform? C.D. Howe Institute, Commentary No. 193 (Toronto: C.D. Howe Institute).

Courchene, T.J. (1997), "Generation X vs. Generation XS: Reflections on the Way Ahead", in K. Banting and R. Boadway (eds.), Reform of Retirement Income Policy: International and Canadian Perspectives (Kingston: School of Policy Studies, Queen's University).

__________ (2002), Half-Way Home: Canada's Remarkable Fiscal Turnaround and the Paul Martin Legacy, Policy Matters 3(8) (Montreal: Institute for Research on Public Policy).

__________ (2003), "Medicare as a Moral Enterprise: The Romanow and Kirby Perspectives", Policy Matters 4(1) (Montreal: Institute for Research on Public Policy).

Greenspon, E. and A. Wilson-Smith (1996), Double Vision: The Inside Story of the Liberals in Power (Toronto: Doubleday Canada Ltd.).

Kesselman, J. and F. Poschmann (2001), A New Option for Retirement Savings: Tax-Prepaid Savings Plans, C.D. Howe Institute Commentary No. 149 (Toronto: C.D. Howe Institute).

Appendix

The 1995 Federal Budget: Retrospect and Prospect
TABLE OF CONTENTS

Acknowledgement

Preface

Session I: The International Dimension

Leo de Bever
International Impact of the Federal Budget

Sylvia Ostry
The 1995 Federal Budget: The International Dimension

Session II: A Quantitative Assessment

Thomas A. Wilson and D. Peter Dungan
Economic and Fiscal Effects of the 1995 Federal Budget: A Quantitative Appraisal

Session III: The Expenditure Dimension

William B.P. Robson
Federal Spending in Four Dimensions

Bryne B. Purchase
Born Again Government?

Session IV: The Federal-Provincial Dimension

Robin Boadway
The Implications of the Budget for Fiscal Federalism

Thomas J. Courchene
The Federal-Provincial Dimension of the Budget:Two Cheers for the CHST

Session V: The Taxation Dimension

Jack M. Mintz and Duanjie Chen
The Budget's Tax Policy: A Ship Lost at Sea

Session VI: The Social Policy Dimension

Sherri Torjman
The 1995 Federal Budget: a.k.a. The Real Social Security Review

Keith Banting
Who "R" Us?

Session VII: Assessment and Perspectives

Pierre Fortin
Six Observations on the Budget

William Scarth
The Federal Budget: Assessment and Perspectives

The 1997 Federal Budget: Retrospect and Prospect
TABLE OF CONTENTS

Acknowledgement

Preface/Executive Summary

Session I: The Martin Budgets: An Assessment

John McCallum
The Martin Budgets

William Watson
Paul Martin's First-Term Record

Andrew Sharpe
Perspectives on Federal Fiscal Policy in the 1990s and Beyond

Session II: A Quantitative Assessment

Thomas Wilson, Peter Dungan and Steve Murphy
The 1997 Federal Budget: A Quantitative Assessment

Session III: The Child Benefits Package

Ken Battle
The 1997 Budget and the Child Benefits Package

Lisa M. Powell
Revamping the Child Tax Benefit System: An Assessment

Session IV: Payroll Taxation

William B.P. Robson
Not as Bad as it Looks: An Intergenerational View of the CPP Tax Hike

Dale Orr
Employment Insurance Premiums: An Economic Policy Analysis Perspective

Session V: Jobs and NAIRU

Pierre Fortin
Canada's Job Growth Potential

Peter Pauly
Canada's Job Growth Potential: Comments

Session VI: Provincial Perspectives

Paul Boothe
Fiscal Reform in Alberta: The Dinning Budgets

Teresa Courchene and Chris Forbes
Provincial Finances: From Deficits to Debt Reduction

Session VII: Assessment and Perspectives

Leo de Bever
Fiscal Policy: Reclaiming the Ability to Choose

Rick Egelton
Fiscal Finances: Debt Burdens and Policy Choices

Harvey Lazar
The Social Policy Legacy

The 2000 Federal Budget: Retrospect and Prospect
TABLE OF CONTENTS

Acknowledgement

Introduction

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

Harvey Lazar
The Social Union Framework Agreement and the Federal Budgetary Process

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

Session II: The Budget and its Macroeconomic Effects

Thomas A. Wilson, Peter Dungan and Steve Murphy
Macroeconomic Effects of Budget 2000

Rick Egelton
Macroeconomic Effects of the 2000 Federal Budget

Gregor Smith
Macroeconomic Forecasts and the Budget

Session III: The Taxation Dimension

William B.P. Robson
Counting Chickens and Unhatched Eggs: The Post-Budget Outlook for Canadian Taxes

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

Robin Boadway
Tax Changes in the 2000 Federal Budget

Session IV: The Expenditure Dimension

Lars Osberg
Federal Expenditures in Canada:The Millennial Vision and its Tensions

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

Session V: The Social Policy Dimension

Frances Woolley
Budget 2000: A Children's Budget?

Keith Banting
Do We Know Where We Are Going?

Session VI: Assessment and Perspectives

Jim Stanford
Paul Martin's Tax Revolt

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

Session VII: Budgeting in the New Millennium

Jack M. Mintz
Some Reflections on the Budget Process and the Fiscal Issues Confronting Canada

Return to Top

Preface and Acknowledgement	. . .	iii
Introduction The Martin/Chrétien Fiscal Legacy: Reflections from the Perspective of the 2003 Budget Thomas J. Courchene	. . .	1
Session I: Budget Context
The Politics of the 2003 Budget Jeffrey Simpson	. . .	29
Balanced Budgets as a Canadian Fiscal Value? Richard Harris	. . .	37
Session II: The Budget and its Economic Effects: Quantitative Evaluation of the Budget
The 2003 Federal Budget: A Quantitative Appraisal Thomas A. Wilson, Peter Dungan and Steve Murphy	. . .	51
Economic Impact of the 2003 Federal Budget Rick Egelton	. . .	65
The Budget: Impacts on Short-Term Aggregate Output and Long-Term Productivity Growth Pierre Fortin	. . .	73
Fiscal Policy in the Chrétien Years William Scarth	. . .	79
Session III: Budgetary Accounting and Transparency
Full Accrual Accounting John Wiersema	. . .	85
The Search for Budget Transparency Michael C. McCracken	. . .	97
Budgetary Accounting and Transparency: Lessons from Private-Sector Experience Alan Macnaughton	. . .	107
Session IV: The Tax Dimension
The Chrétien Government's Legacy: A Tax System for the 21st Century? Bev Dahlby	. . .	113
Unfinished Business: A Tax System for the 21st Century Jonathan R. Kesselman	. . .	151
Session V: Fiscal Aspects of Kyoto
Budget '03 and the Kyoto Process Ross McKitrick	. . .	171
Canada's Kyoto Commitment: Fiscal and "Real" Aspects Christopher Green	. . .	193
Session VI: The Social Dimension and Fiscal Aspects of Health
Linking Economic and Social Policy -- To Benefit All Canadians Frances Woolley	. . .	211
The Health-Care Budget: Did it Resolve the "Crisis"? Armine Yalnizyan	. . .	231
The Evolution of the CHST in the 2003 Budget Michael Mendelson	. . .	263
Fiscal Sustainability and the 2003 Federal "Health" Budget Paul Boothe	. . .	273
Contributors