The 2006 Federal Budget: Rethinking Fiscal
Priorities
Charles M. Beach, Michael Smart and Thomas A. Wilson (eds.),
2007 (Paper ISBN: 978-1-55339-125-8 $34.95) (Cloth ISBN:
978-1-55339-126-5 $85.00)
Jump to
| Contents | |
| Introduction | |
| Preface | . . . | iii |
| Introduction Charles M. Beach, Michael Smart and Thomas A. Wilson |
|
|
| Session One: Budget Making and Budget Context
The 2006 Budget: Political Context |
. . . |
|
| Lessons from the United States for Canadian Tax
Policy Under the New Conservative Government Joel Slemrod |
|
|
| The 2006 Budget: Economic Context Jack M. Mintz |
. . . |
|
| Session Two: Tax Alternatives and Evaluation
of the Budget
The 2006 Federal Budget: A Quantitative Appraisal |
. . . |
|
| The Budget and Tax Reform: A Lost Opportunity? Robin Boadway |
. . . |
|
| The GST Cut and Fiscal Imbalance Michael Smart and Richard Bird |
. . . |
|
| Session Three: Panel on Fiscal Imbalance and
Equalization
Turning a New Leaf: The Federal Strategy for Fiscal Arrangements
Reform |
. . . |
|
| Fiscal Imbalance and Equalization: Possible End Games Fred Gorbet |
. . . |
|
| When Fiscal Imbalance Becomes a Federal Problem Alain Noël |
. . . |
|
| Session Four: Child Benefits and Daycare
Of Beer and Popcorn: Federal Policy on Child Care and Child Benefits |
. . . |
|
| Comments Rose Anne Devlin |
. . . |
|
| Session Five: Productivity Agenda and
Competitiveness
Canadian Competitiveness |
. . . |
|
| Session Six: Sustainability of the Fiscal Plan --
Wrap-Up Panel
Economists Need to Do a Better Sales Job If They Want Their Agenda
Adopted in Budgets |
. . . |
|
Risk and Uncertainty in the Federal Budget |
. . . |
|
Sustainability of the Fiscal Plan: Problems, Cheers, Boos and Hopes |
. . . |
|
| Contributors |
| Return to Top |
INTRODUCTION
Charles M. Beach, Michael Smart and Thomas A. Wilson
Major Measures and Themes of the Budget
The general themes of the budget reflected both the circumstances of a
new and minority government and the perspective and election promises of
the Conservative leadership. The budget was devoted to implementing a
number of major planks of the Conservative election platform. Its focus
was largely on the short-term (two-year) horizon, and it sought to
establish the fiscal credibility of the new government and a governing
party, which had been out of power for so long. As several commentators
in the following papers have noted, it was very much a political
rather than a straight economic document, which aimed to see the
Conservatives through a period of minority government to hopefully,
on their part a majority in the next election.
The budget contained a number of tax reductions and credits that sought
to put more money in the hands of taxpayers, who could then choose how
to spend it or not as they saw fit. Not surprisingly, the budget
was estimated to create a fiscal stimulus to the Canadian economy
resulting largely from the expenditure-enhancing effects of the range of
tax reductions, of which by far the largest was the GST rate cut.
Greater reliance on individual choice and decision-making was also
manifested in the new Universal Child Care Plan introduced by the budget
rather than providing government subsidies to child care providers and
increased government-funded daycare positions.
Entitled "Focusing on Priorities", the budget did not seek to be all
things to all people, but outlined which of the major Conservative
campaign promises would be tackled in 2006 and which postponed to 2007.
While the budget did not directly address the so-called fiscal imbalance
with the provinces leaving this for the following budget it was
accompanied by a major budget background paper, "Restoring Fiscal
Balance in Canada: Turning a New Leaf", which laid out a framework for a
fiscal federalism for the government to follow. Overall, the 2006 budget
had little to say directly on issues of competitiveness and economic
performance. But it offered a commitment to a competitiveness agenda
again, with an eye toward the 2007 budget.
Finally, the 2006 budget and the process leading up to it changed the
approach to budgeting in a number of regards from that of recent years.
There was little reliance on medium-term fiscal targets, and the
substantial "prudence factor" built into the fiscal projections of
recent Liberal budgets was eliminated. Underestimated revenue forecasts
had repeatedly led to "surprise" budgetary surpluses followed by
year-end expenses and ad hoc expenditure growth that had not passed
through the standard budget-debate process. The 2006 budget sought to
get rid of such end-of-year activity and revert to more conventional
budgeting processes. This could lead to greater transparency and
accountability in the budgetary process, as William Robson points out in
his summary remarks.
More specifically, the 2006 budget included a one-point reduction in the
federal GST effective July 1, 2006. It provided a phased-in reduction in
the lowest personal income tax rate and an increase in the basic exempt
amount of income for the personal income tax, but these were actually
smaller than the PIT reductions commited by the previous Liberal
government in its November 2005 fiscal update. It also included a
phased-in reduction of two points in the general corporate income tax
rate, and it eliminated the corporate income surtax both of which were
originally committed by the previous government. The budget also
accelerated the elimination of the federal capital tax. A new Canada
Employment Credit for employees' work expenses was introduced as a tax
credit on employment income with a phased-in rising upper limit. The
budget contained some favourable tax treatment for small business and
for tradespeople's work expenses. It also gave more generous tax
treatment to post-secondary students. Expenditures were increased for
the Canadian military and national security activities. Additional
funding was also provided to provinces and territories to help support
post-secondary education infrastructure investment and to increase
direct support for R&D investment.
Economic Evaluation of the Budget and Themes of the Conference
There was a surprising degree of agreement at the conference on the
general evaluation of the budget. It was thought that the budget was
generally quite successful in accomplishing the goals or objectives of a
leadership that wanted to convey its priorities and do what it said it
would do. The budget was indeed pretty straightforward and transparent.
But as pointed out by Don Drummond and several others, the budget was
more a political than an economic document because some of the choices
it made reflected political favour rather than most economists'
recommendations. The prime example here was the one-percentage-point cut
in the GST rate. Most economists would argue that it is better to tax
consumption rather than people's savings, so if taxes are to be cut, it
is preferable to reduce general income tax rates, so as to reduce taxes
on both savings and consumption, rather than reduce taxes on consumption
alone. But the election promise to cut the GST was evidently a clever
political strategy aimed at distinguishing the Harper team from past
Liberal (and Conservative) governments. Politics may trump economics in
election campaigns and in minority Parliament budgets as well.
More broadly, several commentators noted that the budget represented a
missed opportunity given the substantial fiscal room available. The
budget could have reduced taxes on savings and investment, or income tax
rates cut, rather than cut the tax rate on consumption. Robin Boadway
expressed the need to use the occasion for some fundamental tax reform
in Canada, something that hasn't occurred in quite a long time. Michael
Smart and Richard Bird argued, however, that cutting the federal GST
rate could serve as an opportunity to re-balance the federal-provincial
tax structure and make Canada's overall tax structure more rational. It
will remain for later budgets to see whether this occurs or whether the
GST cut is simply a stand-alone measure. Many economists such as Don
Drummond expressed disappointment that the budget did not advance the
cause of sustainable economic improvement or noticeably seek to improve
Canada's economic performance. But this was largely attributed to the
general public (and hence politicians) essentially not buying into the
economists'advice. The latter clearly need to do a better job of
convincing the former of the potential long-run benefits of such an
economic agenda as so far, this has not really caught the public's
attention.
Overview of the Papers
The first three contributions in this volume provide some political and
economic background to the 2006 federal budget.
In "The 2006 Budget: Political Context", Andrew Coyne points out that
the budget was not a coherent conservative budget but quite pragmatic
"a budget a Liberal finance minister could have happily delivered". He
reviews the major Conservative campaign promises and shows how the
budget was very much devoted to implementing the major fiscal and
economic planks of the Conservatives' election platform "to reassure
their base and yet avoid alarming the broader public". In contrast to
recent budgets, though, the Conservative government has largely chosen
not to spend more but to tax less and make greater use of tax credits to
deliver programs such as the new Universal Child Care Plan. At the same
time, the government's budgetary choices show internal contradictions
and have often boxed the government in and gone against a number of
traditional conservative principles. While preferring smaller, less
intrusive government, for example, the Conservatives are actually
spending more than the previous Liberals. The off-budget foundations
that the Liberals had made ample use of have been brought back onto the
government books as an improvement in clarity and transparency. But
then the Conservatives carried on the previous Liberal approach of
committing substantial future spending for example, on post-secondary
education. The budget acknowledges a fiscal imbalance with the
provinces, but seems rather vague about what the government plans to do
about it. Indeed, the budget background paper "Restoring Fiscal Balance
in Canada" reads as if what the new government means by restoring
balance is more akin to the traditional conservative idea of
disentangling federal spending from areas of provincial jurisdiction.
Coyne thinks that the subsequent negotiations for a new fiscal
federalism will likely involve the federal government seeking a quid pro
quo from the provinces to improve the general workings of the Canadian
economic union, such as a reduction of provincial trade barriers and
improved labour mobility.
Joel Slemrod in his paper "Lessons from the United States for Canadian
Tax Policy under the New Conservative Government" inquires about what
lessons can be drawn for Canada from recent US tax policy changes and
tax policy thinking. He focuses his remarks on a US dalliance with
fundamental tax reform in the form of a presidential commission and on
the interaction between tax levels and spending levels in the United
States. This commission was charged with recommending alternative ways
of structuring the federal tax system that would remain revenue-neutral.
The commission's report, delivered in November 2005, offered two
alternative reform proposals "an income tax framework with generous
tax-preferred savings accounts ... and a consumption tax framework with
tax on capital income flows". Both proposals would repeal the
alternative minimum personal income tax, among many other reforms, but
they also rejected a value-added tax (VAT) such as the GST in Canada as
being too "hidden". The general response to the report was not
enthusiastic, perhaps because entrenched tax constituencies preferred to
keep their current entitlements, and consequently, the commission's
proposals are not likely to be adopted. A cautionary note for Canada
that may come out of this experience is to be wary of adding "bells and
whistles" to our current personal income tax system.
The second area of Slemrod's comments on the recent US experience has to
do with the huge US fiscal deficit. If it is viewed that major tax cuts
are a way of "starving the beast" and forcing smaller government
expenditures, this has resoundingly not worked in the United States,
because federal expenditures have failed to decline. The result is very
large deficits that lower national savings at a time when a large number
of people are getting older and will be easing into retirement and
facing higher health costs. Canada should seek to avoid such a long-run
fiscal imbalance.
The paper "The 2006 Budget: Economic Context" by Jack Mintz also
emphasizes the budget's intent to implement the promises of the
Conservatives' election platform and to create trust in the new
government. "This budget was more about winning a majority government in
the future than responding to critical economic issues." Mintz reviews
three economic issues that federal budgets will need to address. The
2006 budget did little to address the issue of Canada's international
competitiveness or to improve productivity. The aging Canadian workforce
and impending baby boom retirements raise problems of savings, pensions,
labour shortages, and again, productivity, which will also have to be
addressed in future budgets. Finally, fiscal imbalance will have to be
addressed sooner rather than later to stop Canada transforming itself
from a stable into an unstable federation.
The next three contributions in this volume evaluate the macroeconomic
effects of the 2006 budget and examine alternatives to the current tax
structure in Canada.
In "The 2006 Federal Budget: A Quantitative Appraisal", Peter Dungan,
Steve Murphy and Tom Wilson use the FOCUS macroeconomic model of the
Canadian economy at the University of Toronto's Institute for Policy
Analysis to evaluate the overall fiscal impacts of the budget. The
Budget Plan 2006 indicates that overall, the fiscal measures
implemented, including those committed by the previous government in
November 2005, provide a large fiscal stimulus of $15.2 billion in
200607 and $16.1 billion in 200708. Dungan et al. estimate that the
impacts of just the new measures introduced in the 2006 budget, however,
provide a more modest fiscal stimulus of $6.6 billion in 200607 and
$7.4 billion in 200708. "Tax reductions account for most of the fiscal
stimulus $4.5 billion in 200607 and $6.0 billion in 200708.... Of
the revenue reduction, the lion's share is accounted for by the
one-percentage-point cut in the ... GST" $3.6 billion in 200607 and
$5.2 billion in 200708. When no monetary response to this stimulus is
built in, the authors estimate that real GDP will increase by 0.3% in
200607 and by 1.1% in 200708, CPI inflation is reduced by 0.5 and
0.2 percentage points respectively, and the unemploy-ment rate is
reduced by 0.1 and 0.6 percentage points respectively as well. With a
monetary response built in, the 200708 figures are only slightly
dampened.
Robin Boadway's paper on "The Budget and Tax Reform: A Lost Opportunity"
notes that while the budget contained a large number of tax measures,
none of them represented fundamental tax reform which the Canadian
tax system needs and has not seen for a long time. Boadway considers
what kind of tax reform would have been suitable. He begins with a
discussion of some of the main problems facing the current Canadian tax
system, such as that capital income is taxed too highly, different forms
of asset income are taxed differently, the taxation of business income
is seriously compromised, and the current system of provincial sales
taxes imposes serious inefficiencies.
Boadway then sets out a "tax reform manifesto" of four proposed major
tax reforms for Canada. The first reform would involve a dual income tax
system that has different rate structures for capital and non-capital
incomes capital income with a proportional tax rate and non-capital
income subject to a progressive tax rate structure similar to what
has been adopted in the Nordic countries. The second proposal is a
reform of the sales tax system by replacing the federal GST and the
system of provincial retail sales taxes (RSTs) with a national VAT
combined with an explicit revenue-sharing agreement between the feds and
the provinces similar to that used in Australia. Third, the system of
business taxation should be rationalized to address major shortcomings,
particularly with respect to the tax treatment of the resource sector.
The fourth and possibly quite contentious proposal "would ... maintain
fiscal balance in the federation by retaining and consolidating the
federal share of the tax room" rather than turning over tax points to
the provinces. Boadway argues that there is much to be gained from such
an agenda of fundamental tax reform for Canada.
Michael Smart and Richard Bird, in their contribution, "The GST Cut and
Fiscal Imbalance", argue the position that the government's commitment
to reducing the GST rate may actually serve as an opportunity to
re-balance the federal-provincial tax structure in Canada more
rationally by working out an arrangement to harmonize the provincial
RSTs and the current Harmonized Sales Tax (HST) to the federal GST tax
base. The authors broadly outline Canada's current fiscal arrangements
and then discuss how consumption taxation particularly in the five
provinces that have retail sales tax systems can best be shifted or
realigned from Ottawa to the provinces. The latter's "badly broken" RST
systems can then be reformed by moving to a broader value-added tax base
like the GST, but allowing for different tax rates across provinces
including the HST provinces. Among the consequences of such a change
would be large reductions in the statutory tax burdens on business, and
especially business capital inputs, thus offering improved incentives
for business investment. After the introduction of the HST in 1997, for
example, investment per capita in the reforming provinces rose relative
to those provinces that retained their RSTs. The equalization system
would then be adjusted through reduced transfers to accommodate such a
shift in taxation.
Paul Boothe, in his remarks on "Turning a New Leaf: The Federal Strategy
for Fiscal Arrangements Reform", addresses the government's budget
background paper "Restoring Fiscal Balance in Canada: Turning a New
Leaf" and reviews and evaluates its arguments. The budget paper
"outlines the framework within which the debate and ultimate reform of
fiscal arrangements would take place". It seeks to change the direction
of the federal government on the fiscal imbalance issue, articulate the
quid pro quo for fiscal arrangement reform in order to enhance the
economic union, and set out benchmarks for success and the process the
government would follow. The three areas of quid pro quo identified are
better recognition of professional and technical qualifications across
provinces and for new immigrants, more common security regulation, and
greater tax harmonization across provinces with separate RSTs.
Benchmarks for success would include, for example, enhanced
accountability, fiscal responsibility, and predictability of transfers.
Boothe considers three possible ways that this process could unfold, and
he thinks that "the new government is on track to significantly alter
Canadian fiscal arrangements".
Fred Gorbet was a member of the federal Expert Panel on Equalization and
Territorial Formula Financing. His contribution, "Fiscal Imbalance and
Equalization: Possible End Games", offers some personal observations on
the fiscal imbalance issue and on the panel's conclusions (the O'Brien
Report), and it suggests two possible outcomes of the fiscal imbalance
discussions. Gorbet believes that the fiscal imbalance issue is real and
needs to be addressed in a comprehensive manner. "[The panel's]
overriding concern was to move Equalization away from ad hoc agreements,
or treaty federalism', and return to a program that is based on a set
of principles, that has a clear formula supporting it, that is
transparent, and that treats all provinces identically." One of the
principles underlying the panel's work is that of equity: essentially,
that no province receiving equalization payments should have a higher
fiscal capacity than a province (such as Ontario) not receiving
payments. The panel thus recommended that a cap on equalization payments
be introduced to give effect to this principle. It estimated that by
200708, this cap will limit payments to Saskatchewan and to
Newfoundland and Labrador.
The report has generally been well received by the provinces and by
public commentators, and Gorbet thinks that any fiscal arrangements
will, consequently, likely be modelled along the lines of the report.
What he would like to see as an eventual arrangement is the core element
of the report being adopted, along with the federal government
transferring GST points to the provinces, a dollar-for-dollar reduction
in the Canada Health Transfer (CHT) and Canada Social Transfer (CST) to
the provinces, and some form of harmonization of the provincial RSTs
with the GST. But what he expects to see adopted is a package of core
elements of the report along with additional post-secondary education
transfers to help get more money to Ontario.
The third contribution to this general discussion of fiscal imbalance is
by Alain Noλl, one of the early proponents of the concept. In "When
Fiscal Imbalance Becomes a Federal Problem", Noλl reviews the recent
political history of initiatives to address fiscal imbalance in the
federation. The initiator of the fiscal imbalance debate was the 2002
report of the Quebec Commission on Fiscal Imbalance. It saw that the
"vertical fiscal gap between the two orders of government was such that
Ottawa accumulated surpluses, while the provinces had difficulties
maintaining balanced budgets; transfers proved insufficient, unstable,
and often conditional; and the federal government often used its fiscal
capacity to intervene in provincial areas of jurisdiction. As a result,
the country became less and less true to the federal principle, social
programs were poorly financed, and transparency and accountability were
lacking". The commission proposed abolishing the Canada Health and
Social Transfer (CHST) and replacing it with additional tax room for the
provinces, such as leaving all the GST to the provinces. The federal
government's reaction was that such an imbalance was not possible "since
all governments had access to all sources of revenue".
In 2005, the Council of the Federation set up an Advisory Panel on
Fiscal Imbalance, which the following year recommended an increase in
the CHT and the CST, a new Tax Point Adjustment program, and a major
reform of equalization (based on a ten-province formula that takes full
account of natural resource revenues). However, the election of the
Conservatives to government significantly changed the message coming
from Ottawa. They set up the Expert Panel on Equalization and
Territorial Formula Financing, which reported in May 2006. Details of
this report have already been reviewed in the preceeding chapters by
Boothe and Gorbet. A significant feature of the report is the
recommendation for only a 50% rule for natural resource revenues. "...
the panel identifies the deficiencies of the current equalization
program and proposes solutions that are coherent and in many ways in
line with what is proposed in the earlier documents. Because it insists
on the autonomy principle, on the unconditional character of
equalization, and on provincial prerogatives regarding natural
resources, this report also brings the discussion closer to the
perspective first put foward by the [original Quebec] Commission on
Fiscal Imbalance."
The next three chapters examine the specific issues of the budget's new
Universal Child Care Plan (UCCP) and the extent to which the budget
advances a Canadian competitiveness and productivity agenda.
In his paper, "Of Beer and Popcorn: Federal Policy on Child Care and
Child Benefits", Kevin Milligan analyzes the government's new child care
initiative from the perspective of efficient private and social
decision-making. The budget's UCCP makes good on one of the
Conservatives' election promises. The plan calls for a straight transfer
of $100 per month to be paid to the parents of each child up to age
five. It essentially replaces the Canada Child Tax Benefit of $249 per
year. The plan also involves a commitment to assist in creating up to
25,000 new child care spaces per year. This plan contrasts with the
previous Liberal government's arrangement of $1 billion per year in a
specific block grant to the provinces for child care programs
(essentially more organized daycare spaces), with differing agreements
across provinces. Milligan sets out an economic-choice framework for
analyzing under what circumstances and to what end the government should
involve itself in child care decisions. Of principal focus are the roles
of externalities, income constraints, and information inadequacies in
family child care decision-making. His "analysis strongly suggests that
parents' information and their capacity to make effective choices is
central to determining which types of policies are desirable and is the
determining difference between the two main party positions.... Liberal
policies are more justifiable if one thinks parents are poorly informed
or equipped to make decisions about their children, while Conservative
policies are more justifiable if not".
Rose Anne Devlin, in her "Comments" on the Milligan paper, takes issue
with Milligan's framework of analysis and hence with his conclusions.
The standard economics debate about the choice between money versus
in-kind transfers is meaningful for an equivalent-valued in-kind
subsidy. But $100 per month per young child is not close to being an
equivalent value of a subsidized daycare space. Furthermore, child care
is linked with a family's labour market decision, particularly of the
mother. Parents seeking the best option for their child may find that
$100 per month is simply not enough to really affect their decision. And
for families living in poverty, the main option allowing the mother to
contribute to household earnings is a subsidized child care space. "I
would claim that the substantive difference across the two policies is
that the former provides a real daycare alternative to low-income
households, while the latter does not."
In the chapter "Canadian Competitiveness", Richard Harris considers
Canada's major challenges with respect to competitiveness, discusses
what may be going on with respect to Canadian productivity growth, and
then reviews some specifics of the 2006 federal budget that may affect
Canada's competitive position. Harris identifies three major challenges
affecting Canada's competitiveness: a (possibly permanent) increase in
real commodity prices, especially energy; a shift in US growth and trade
patterns that is adjusting to a lower dollar and reduced consumption
levels and may possibly turn protectionist; and the advent of a changed
mechanism by which productivity gains have distributionally quite
different real income effects, dramatically favouring the very top end
of the income distribution. Among the factors contributing to this
changed productivity growth paradigm are the increasing contestability
of labour markets, stronger protection of innovations and innovation
rents by incumbent firms, and the increased global market size
associated with globalization and the revolution in information and
communication technologies. He concludes, "Unfortunately, if I am
correct, the trade-off between growth and inequality may have taken a
turn for the worse, both at the level of the individual and across
national economies." Harris reviews a number of measures in the 2006
budget for their effects on productivity in Canada and finds that
overall, the budget had relatively little to say on the issue of
competitiveness, but generally its effects were in the right
direction.
The final three contributions contain panelists' comments from the
wrap-up panel of the conference, paying special attention to the broad
sustainability of the 2006 budget's fiscal plan. Don Drummond leads off
with the sentiment "Economists Need to Do a Better Sales Job If They
Want Their Agenda Adopted in Budgets". He argues that the budget was
more a political than an economic document and what made it "popular"
were precisely the tax breaks such as the one-percentage-point cut in
the GST rate that most economists criticized as inefficient. What he
most liked about the budget was that it dropped the economic prudence
factor so that smaller unanticipated surpluses can arise and fiscal
activities are more transparent and accountable, the government's
commitment to a competitiveness and productivity agenda for the next
year's budget, and the framework laid out for improvements to fiscal
federalism. Items on economists' wish list to reform such as a move
to value-added sales taxes by several provinces, tax incentives to help
protect the environment, and Employment Insurance reform are tough
sells to the public when there is no crisis. Economists will have to
come up with a more convincing sales job before politicians will take
notice.
Gregor Smith's piece addresses issues of "Risk and Uncertainty in the
Federal Budget", and it comments on the risk and uncertainty associated
with the macroeconomic forecasts involved in the budget. He briefly
reviews macroforecasting results of the effects of the budget by the
major banks in Canada, the Bank of Canada, and the IMF and OECD. He
notes that the risks in the macro projections underlying the budget
(such as, a rise in inflation as well as interest rates) are correlated,
but the analysis in the budget documents does not seem to allow for this
correlation. He also questions how meaningful it is for the budget to
provide point forecasts for its surplus. It might be better to use
information about the dispersion in private-sector forecasts for
macroeconomic variables as an estimate of uncertainty in these
variables, and this could then be translated into confidence intervals
for federal revenues and the budget surplus. The budget also mentions
several external risks (such as a fall in US housing prices or a rise in
the Canadian dollar), but it does not discuss their implications for the
budget. This contrasts with the 2006 Ontario budget, which includes
quite a detailed discussion on this topic. "It is hard to avoid the
conclusion that the [budget's] ... forecasting exercises are somewhat
half-hearted."
In "Sustainability of the Fiscal Plan: Problems, Cheers, Boos and
Hopes", William Robson expresses a criticism of federal budgeting
practices over the previous decade. In the name of avoiding budget
deficits, the government underestimated the amount of fiscal room
available by using misleadingly low forecast numbers for revenues, then
padding expenditures with economic prudence and contingency reserves.
These practices resulted in "surprise" surpluses, which were then
largely converted into additional year-end expenditures, even though
they had not gone through the evaluation process as part of the original
budget a process that is less than ideal for overall transparency and
accountability. And some of the end-of-year numbers involved here were
really quite large. He is encouraged that the 200506 fiscal year just
ended "marks a welcome break from a pattern of ad hoc growth in federal
spending". He hopes that the new government will resist the pressure for
such ad hoc end-of-year spending. He makes recommendations for two
changes to the fiscal budgeting process that he believes will improve
the chances for a sustainable fiscal framework. He would like to see the
formal acknowledgement of risk and uncertainty in the budget's fiscal
projections, say through use of probabilistic forecasts, rather than the
approach of padding expenditures with contingency funds and low-balling
prospective surpluses. He also calls for some independent agency other
than the Department of Finance (such as, a Parliamentary Budget Officer)
to lay out the economic and fiscal backdrop for the budget's fiscal
plan.
As of this writing, the Conservatives have presented their second budget
for 2007 and there does not appear to be a combined effort by the
Opposition to defeat the Harper government any time soon. So the 2006
budget may be the beginning of a new fiscal regime and a new set of
priorities and attitudes in Ottawa that will carry on for some while
yet.
The 2006 federal budget was the first for a new Conservative government
after 13 years of Liberal governments. This was also a minority
government, elected under a prime minister from the West who had made
some distinctive election promises and set out a clear set of fiscal
priorities. The budget was a major platform for implementing a number of
these promises and priorities. It thus represents an occasion to rethink
fiscal priorities in Canada such as cutting the Goods and Services Tax
(GST), addressing "fiscal imbalances" with the provinces, and
implementing a different approach to child care and child benefits. The
objective of the June 2223, 2006, conference on the 2006 federal
budget, and the papers and commentaries in this volume, is to better
understand the directions of the new budget, their likely effects on the
economy, and their implications for the budgeting process and future
initiatives by the new administration.
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