Feds prepare to release for strategically difficult budget This will be the first budget overseen by deputy minister Michael Horgan, who was appointed to the job in early September. By CYNTHIA MÜNSTER Published December 21, 2009

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Photograph by Jake Wright, The Hill Times

Budget talk: Finance Minister Jim Flaherty, pictured on Parliament Hill.

Senior Department of Finance officials will meet soon with Prime Minister Stephen Harper and Finance Minister Jim Flaherty to determine what will be in the 2010 budget while other behind-the-scenes work is ramping up for what will be a strategically difficult budget to prepare, says Canada's Parliamentary budget officer.

Kevin Page, the Parliamentary budget officer who has 10 years of experience working on budgets and fiscal forecasting in the Finance Department and later also at PCO, said the government will have to balance the stimulus funding previously announced and the economy's fragile growth. "Most people are projecting modest growth in 2010 and they'll plan on that but the growth is still fragile," he said. "Maybe things can slow down. They worry about how strong the U.S. economy can be, how strong is the U.S. consumer, what are those issues that we don't know about? Could we have more cracks in the financial system? So they're trying to figure out how to balance the risk."

Department of Finance bureaucrats usually meet, organize, study, develop, and write the federal budget beginning now. In December the main question is when the budget will be presented, whether in January, like last year, or more traditionally, in February or March. The date needs to be decided at this time so that the public servants can plan and organize with a deadline in mind. They are already booking the meetings between Prime Minister Stephen Harper (Calgary Southwest, Alta.) and Finance Minister Jim Flaherty (Whitby-Oshawa, Ont.) that will happen in January to determine the release date, said Mr. Page, who used to be in charge of booking the meetings when he worked at Finance.

This will be the first budget overseen by deputy minister Michael Horgan, who was appointed to the job in early September. It will be an important, key budget, because it is the second part of the two-year stimulus package. Because of this, it will need to show how the stimulus funding that has led to a $56-billion deficit this year has benefited Canada's economy, said Global Insight economist Dale Orr.

"You certainly could have a very substantive budget, dealing with as we emerge from the recession, what are our plans? How are we going to phase out the stimulus, what are the risks, how are we going to deal with this process of winding-down stimulus, keeping the economy going, there's a lot of very substantive issues to deal with over the next couple of years," said Mr. Orr.

Former deputy minister Scott Clark told Civil Circles that when he was DM from 1997 to 2000, by the time Christmas came "we had pretty much already made the decisions on the budget."

Mr. Clark, along with former director of fiscal policy Peter DeVries, penned an opinion piece for The Globe and Mail last week, advising Mr. Harper and Mr. Flaherty to deal with the looming deficit by increasing taxes and cutting spending in a future budget. This is the first time Mr. Clark has given unprompted advice in such a public forum, but he said he isn't sure the government will listen.

The piece recommended bringing back the two GST percentage-points the Conservative government reduced over its mandate, freezing the corporate tax rate at 18 per cent, and re-evaluating the "special interest" tax credits introduced since the 2006 budget. They said that cuts to federal spending would probably not yield much, since from their experience, only 25 per cent of total program expenses—about $55-billion—could be subject to significant cutting and a five-per-cent reduction would yield under $3-billion in annual savings.

Mr. Clark told Civil Circles that when he was ADM in Finance in the 1980s he saw how the government did not believe there was a structural deficit year after year, despite the fact that there was one. He said he believes there is a "high risk" that "history is going to repeat itself." However, all public servants can do is advise their political masters and it's up to the politicians to decide to act, he said. The staff at the Department of Finance are fully capable of implementing the measures he recommended and although Mr. Horgan is new to his post, his extensive experience within Finance will suit him well, Mr. Clark said.

"If you believe there was a structural deficit, you wouldn't go out and say, 'We're not going to cut taxes, we're not going to cut transfers to provinces and we're not going to cut transfers to individuals.' By the way, I don't think those transfers should be cut, but if you are going to not cut transfers and not raise taxes, then you either believe the deficit will simply go away as the economy recovers or you believe that you can cut spending in other places and I've been in government long enough and in the Finance Department long enough to know that that kind of savings can't be found," said Mr. Clark.

Mr. Clark and Mr. DeVries were closely involved in the efforts to reduce Canada's deficit in the late 1990s and they are both highly respected in financial circles, both outside and inside of government, said Mr. Orr. Their advice will be read carefully, he said, however, it is unlikely the government will send any kind of signal in that direction for this budget because generally the budgets address the upcoming year and the two that follow and in these three years there will be no deficit elimination, other than what comes from stopping the flow of stimulus funding and the economy getting stronger.

"Everybody would like to know how the government is going to deal with this but since there is no easy way out, it's not a winning issue," Mr. Orr said, adding that the government cannot address the issue in the 2010 budget. If the government doesn't take measures to reduce the deficit, it will take until 2019 for normal growth in the Canadian economy to take care of itself, he said.

Conservative MP James Rajotte (Edmonton-Leduc, Alta.), chair of the House Finance Committee, which recently finished its cross-country budget consultations and tabled a report in the House with a long list of recommendations for the upcoming budget, told Civil Circles that he doesn't agree the consumer taxes should be raised because that would discourage consumption and work against that policy goal. However, he said the government does have a plan in place to deal with the deficit.

"The two-year plan is timely and temporary so in the spring of 2011 the spending runs out just for the stimulus programs, so you take all that spending off the books, the one-time auto investment, that was one time in this year's fiscal year so that's off the books. If you have employment improving, then obviously you'll be paying less there. If you've got more businesses making money then you've got more corporate tax revenue, so that's the way you're going to move towards a balanced budget," said Mr. Rajotte.

"I frankly think that's a solid plan. I think to start raising taxes now or to signal that would be exactly the wrong signals."

cmunster@hilltimes.com

The Hill Times