Conservative Platform Merits A “C”

Mr. Scheer finally released the Conservative platform on Friday afternoon. On the front cover, there should have been pictures of Stephen Harper, Doug Ford, and Jason Kenney. What Mr. Sheer and these three gentlemen have in common is that they hate deficits, no matter what their cause.

Mr. Scheer is promising to eliminate the deficit by cutting government programs and services without providing much in the way of details. Doug Ford and Jason Kenney did the same thing. In their election platforms, they also proposed to cut government spending but didn’t indicate how these cuts would be achieved. Residents of Ontario found out the “ bad news” after the election. Residents of Alberta will find out the “bad news” in the province’s upcoming budget scheduled for later this month.

Mr. Scheer figures that if Ford and Kenney can fool their voters, then he can do it as well. After all there are only 10 days left before the election and no more debates. Even better, early voting is already underway and most, if not all, early voters probably don’t know what Scheer is planning. Good election planning but rotten budget transparency.

In the Platform, Mr. Scheer is committed to balancing the budget in five years – 2024-25, one year outside the next mandate. Obviously, as Speaker of the House, he learned nothing from Stephen Harper’s attempts to balance the budget following the 2008-2009 financial crisis. Harper changed his deficit elimination target several times. First, he had a fixed date and when he thought that would be missed, he promised to eliminate the deficit “over the medium term”. And finally, he finished with a fixed date. Harper spent his entire time as Prime Minister trying to eliminate the deficit and in the end he didn’t succeed

Mr. Scheer has promised to introduce balanced budget legislation once the deficit is eliminated. Digging up “the corpse of a dead fiscal gimmick” seems pretty desperate. This one pops up regularly for “deficit haters” (it was considered by Harper) only to be tossed back in the grave because it doesn’t work. Many balanced budget rules have been tried in the EURO area only to be constantly changed because the rules are constantly being broken to the point they have become a joke. At any rate, if a government is politically determined to maintain a balanced budget why do they need a law do it?

In addition, Mr. Scheer is proposing a PAYGO (pay as you go) spending rule, which requires that the cost of any new proposal must be offset by reductions or elimination of existing programs and/or higher revenues, such that the net impact on the budgetary balance is neutral. This system was first adopted in the United States in 1990. However, Congress has always able to find innovative ways to get around it. It has not been successful in controlling spending or tax cuts.

The Conservative Platform announces new spending initiatives and revenue-reducing measures totalling $6.2 billion in 2020-21, rising to $15.4 billion in 2021-22 before falling to $9.0 billion in 2024-25.

These have been offset by proposed spending cuts together with revenue raising measures totaling $6.5 billion in 2020-21, rising to a whopping $20.4 billion in 2024-25. Public debt charges are adjusted to reflect the lower borrowing costs due to the decline in the federal debt.

As a result of these proposed actions, the budgetary deficit is forecast at $23.0 billion in 2021-22, falling steadily to a forecast deficit of $4.8 billion in 2023-24 and a surplus of $642 million in 2024-25. The Parliamentary Budget Officer costed most of the revenue and spending proposals.

The PBO cautions that there is a high level of uncertainty with respect to the costing of several new policy initiatives, as the estimates cannot fully take into account possible behavioural responses and could be “sensitive to changes in global interest and exchange rates”. Unlike the NDP Platform, this is not recognized as a threat to the achievement of a balanced budget.

Although the background document acknowledges that there are risks to the budget forecast, no risk factor adjustment or Contingency Reserve were included. Without some element of prudence in the forecasts, a balanced budget in 2024-25 is unlikely to be achieved. Prior to the 2008-2009 financial crisis, Mr. Harper eliminated the risk adjustment factor from budget planning. However, after the financial crisis, it was re-introduced to provide credibility to the budget forecast. History might repeat itself given the very high risks of a global downturn in economic activity and geo-political tensions in the next couple of years.

As with the other parties’ platforms, no update was provided for the current fiscal year, 2019-20. The PBO forecast a deficit of $20.9 billion for this year. However, this does not include potential costs associated with recent Human Rights Tribunal order to compensate First Nation children impacted by on-reserve child welfare abuse. This could increase the 2019-20 deficit by up to $4 billion reaching almost $25 billion.

The spending restraint measures total almost $45 billion over the five-year period. This can be divided into three major components. First and largest is the re-profiling of infrastructure funds already set aside in the Liberal budgets. This re-profiling cut amounts to over $18 billion over five years. In the past, the infrastructure program has lapsed authorized spending due to a variety of factors, such as delays in signing contracts, weather conditions, strikes, etc. As a result, the deficit outcome has often been better than expected. Re-profiling such funds introduces an element of risk in the budgetary forecast.

The second largest cut in spending is the reduction in operating costs, amounting to $15.6 billion over five years. This involves maintaining non-salary operating costs at its 2019-20 level of $24.1 billion and applying a gradual phase-in reduction of 1.2% per year, reaching 6% in 2024-25. This measure excludes expenses associated with Crown corporations and other entities. In addition, Mr. Scheer proposes to maintain full-time employment levels at their 2020-21 levels. This implies no new hiring, with the possible exception of filling vacancies due to attrition. By 2024-25, this represents a cut of 18% to the current base.

This is not the first time a government has tried an across the board cut in operating costs. They weren’t successful before and probably won’t be successful now. They are very difficult to implement because spending on government operations is very complex. The only time a cut in government operations was successful was under Paul Martin in his 1995 budget. This required an intensive “program review” of spending in every government department. This was required because at that time the federal government was facing a fiscal crisis. There is no fiscal crisis today that would warrant this.

The third area of spending cuts is to the International Assistance Envelope amounting, to almost $10.5 billion over the five-year period. Although this cut will be criticized by the international community, previous governments have also cut international assistance as one of the first and easiest cuts of their spending restraint exercises.

Finally, a “review” of corporate tax expenditures, along with increased tax enforcement, amount to savings of almost $10 billion by 2024-25. However, these estimates are completely unreliable and are a major risk to achieving of a balanced budget in 2024-25. Often the expected savings are not realized. Any savings from this exercise and from other operating costs should not be included in the fiscal projections until they are actually realized.

Several of the proposed tax reductions are recycled from the Harper era but were eliminated by the Liberals. These include the Green Public Transit Tax Credit, the Children’s Fitness Tax Credit, and the Children’s Arts and Learning Tax Credit. They were eliminated as studies showed that they failed to meet their stated objectives.

These are non-refundable tax credits and only benefit those who have taxable income. This excludes many low-income Canadians. In addition, the aggregate benefit is reduced by the lowest tax rate. Mr. Scheer claims the Fitness Credit will be increased by $1,000. However, as a non-refundable tax benefit, its value is only $137.50, once the lowest tax rate of 13.75% is applied. Anyone who has a child in organized sports quickly realizes that this tax credit is of little benefit.

The Age Tax Credit is also a non-refundable tax credit, which means low-come seniors will receive no benefit from this credit, if they are non- taxable. The proposed reduction in the lowest tax also reduces the value of all non-refundable tax credits, which will now be valued at 13.75% rather than 15%. Mr. Scheer has been misleading Canadians.

The Conservative Platform lacks transparency and credibility and the cover should be stamped “not as advertised”. Even strict fiscal Conservatives should feel let down.

There is little relief for low-income Canadians, despite Conservative claims. It brings back failed tax expenditures, which were not meeting their stated objectives. There are few initiatives, which can be considered as investments in the future and strengthen economic growth. This is a budget for today’s voters and not future voters

There is now a very clear choice between how Liberals and Conservatives would run the country’s finances. Too bad Canadians had to wait so long.

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C. Scott Clark held a number of senior positions in the Canadian Government, including Deputy Minister of Finance from 1998-2001. He has a PhD in Economics from the University of California at Berkeley and is currently President of C. S. Clark Consulting.

From 1990 to 2005, Peter C. DeVries served as Director, Fiscal Policy Division, at the Department of Finance. In that capacity he was responsible for overall preparation of the federal budget. He is currently a consultant in fiscal policy and public management issues.

Their Blog is 3dpolicy.ca