The 2010 federal budget stuck predictably to the Conservative dogma that there is no need for a fundamental change of course. One we get past the temporary hiccup of global and national recession, we must return to a world of ever-smaller government to be achieved through continued tax reductions and deep spending cuts.
Despite the fact that unemployment is and will remain very high -- forecast in the budget itself to average 8.5 per cent this year and 7.9 per cent next year -- temporary extensions of EI benefits will expire in September of this year and some 500,000 unemployment claims filed during the Great Recession will be exhausted before claimants can find a new job.
Corporate tax cuts continue and are even modestly increased in this Budget and there are no new taxes of any consequence, so the burden of deficit reduction will fall entirely on government programs. Despite very low interest rates and one of the lowest debt levels in the advanced industrial countries, federal program spending will be slashed. Spending on international assistance has been singled out for especially deep cuts, even as the world's poor feel the greatest brunt of the global economic crisis.
Since October 2008, almost 500,000 permanent paid jobs have been lost as the manufacturing and forest industry jobs crisis intensified and spread to other sectors. In the last Budget, under intense pressure, the federal government passed an economic stimulus package that, combined with ultra-low interest rates, seems to have stabilized the economy. The Budget estimates that the stimulus package has saved or created 130,000 jobs as of today. But that still leaves us with 1.5 million unemployed workers.
The Budget maintains stimulus measures like short-term infrastructure investment, but only for this coming year. It adds a pitiful suite of new job measures which fall hugely short of real needs. For example, just $108 million will be spent over three years on employment and skills measures aimed at youth, including aboriginal and at-risk youth. About $500 million will be spent over two years on programs to build a more innovative economy, including through support for the National Research Council and university and college research, but this is hardly enough to deliver many well-paid new jobs or a vibrant new economy.
The only EI measure in the Budget is an extension of EI work-sharing, which allows workers to share the pain through reduced hours for all rather than layoffs. Such arrangements, which now cover 160,000 workers, can be extended for a further 26 weeks to a maximum of 78 weeks until March 2011. That move is welcome, but does nothing for the 50 per cent of unemployed workers who do not qualify for benefits and those who are running out.
Economic stimulus from increased government spending in combination with low interest rates helped stabilize the economy. Deficits have financed programs which created jobs and helped the unemployed at a time when the private sector was very weak. As even the International Monetary Fund argues, the recovery is largely driven by government stimulus measures and countries risk a quick return to recession if anti-crisis measures are withdrawn too soon.
The Budget argues that we have to move back quickly to balanced budgets through cuts to social programs, public services, and public sector jobs. For the Conservatives, deficits are the problem, not unemployed workers and their families. For them, balancing the books today is more important than helping people and building a better social and economic future.
But deficits are not a problem when they are used to finance public investment programs which create jobs for people, raise our economic potential, and further our environmental and social justice goals. And they are not a problem when the total government debt today is the lowest of the advanced industrial countries (53 per cent of GDP in 2008-2009 compared to 102 per cent in 1995-1996), and interest rates are at an all-time low. The federal debt is just one-third of GDP, and the cost of servicing that debt is very modest, just 2 per cent of GDP. The federal deficit run this year (2009-2010) sounds scary in dollars, but is only 3.5 per cent of national income, far lower than it was in the early to mid-1990s.
The Budget focuses on balancing the federal government books at the expense of new investments. Significant spending cuts are to be imposed and potential new investments are to be foregone. As a result of economic recovery, the end of economic stimulus measures after this year, and net changes to spending and revenues, the deficit is forecast to shrink from $54 billion in 2009-10 and $49 billion in 2010-2011 to under $2 billion in 2014-15. In this coming year, 2010-11, there will be spending cuts of $800 million, and spending increases of $1.1 billion, but from then on spending cuts gather pace.
By 2014-2015, federal government program spending is forecast to shrink to just 13.2 per cent of GDP compared to 15.6 per cent this year -- a difference of about $35 billion in annual spending. The burden of spending cuts is spread across two major areas: international assistance and federal departments.
Deep cuts are imposed on Canada's international assistance programs. After reaching $5 billion per year this year, spending will be frozen rather than increased at the planned rate of 8 per cent per year. This means spending will be $1.8 billion less than planned by 2014-15, and will be $4.5 billion less than planned over the period from now through 2014-15. The planned rate of increase in military spending is also to be reduced from 2012-13.
A major focus of cuts is departmental programs, leaving transfers to the provinces and to people alone for now. Compared to the existing path of planned spending, there will be $15 billion in cuts over five years starting in 2010-11. The federal government will cut by a total of $6.8 billion the operational cost of government. Departmental budgets will not be increased to fund increased demands as a result of population growth, the increased cost of goods and services purchased by government, and the 1.5 per cent increase in annual wages already in place. Operating budgets will not rise by 1.5 per cent this year to pay for wage increases, and will be frozen for the next two years.
Departments will be required to re-allocate from the remainder of their operating on budgets the means to fund these wage and other increases. A lot of the burden will likely fall on jobs as vacancies arise and are not filled, and there may be layoffs. The government plans to meet with unions to discuss "all compensation costs." The freeze on operational spending will be effectively extended to federal crown corporations such as CBC and Canada Post. On top of this, the government expects to cut another $1.3 billion over five years through program review.
It is too early to predict what will be the results of these cuts, but they will have an impact on jobs and a wide range of programs that will limit the impact of the stimulus package this year and slow economic recovery moving forward.
If the government wants to return to balanced budgets over the medium term without cutting the programs and services needed by working families, there is scope to raise taxes. In the next fiscal year (2010-2011) the two-percentage-point GST cut will cost the government over $12 billion in lost revenues, and the corporate tax cuts will cost almost $9 billion, without any significant impact on real job-creating business investments. Any so-called "structural deficit" -- the deficit that would exist after an economic recovery -- is almost entirely the result of short-sighted Conservative tax cuts.
While tax revenues will rise in line with the forecast economic recovery, the government has more or less stuck to its promise of no tax increases. On top of the phasing out of some tariffs, the Budget also cuts taxes by $30 million per year for Canadian companies which operate internationally by "improving Canada's system of international taxation." In fairness, the Budget also proposes to raise about another $400 million per year by closing down some tax loopholes
The priority in this Budget should have been jobs and support for the unemployed, not deficit reduction. The jobs crisis is still very much with us. Our national debt is low, and interest rates are and will remain very low. It is up to governments to deal with the human impacts of the crisis, and to set the stage for shared progress in the next economy.
A more comprehensive Budget analysis can be found here.
Andrew Jackson is the chief economist at the Canadian Labour Congress.
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