Budget Day in Ottawa

In the days leading up to this week's federal budget, Canadians might have been forgiven for feeling a tad confused about their federal government's mood.

Budget Day in Ottawa

In the days leading up to this week's federal budget, Canadians might have been forgiven for feeling a tad confused about their federal government's mood. The story from Parliament Hill was often about Stephen HARPER's new statesmanlike tone, as the formerly chippy Prime Minister turned all soft-spoken and bipartisan to come to terms with the LIBERALS on Afghanistan. Or the news might have been about, say, provinces going their own way on CLIMATE CHANGE policy, and how the newly diplomatic federal Tories were saying that was just fine by them. But then the next headline off the Hill was as likely to be about Finance Minister Jim Flaherty coming out slugging and surly against Ontario Liberal Premier Dalton MCGUINTY over how to help his province's troubled economy. Or Industry Minister Jim Prentice taking cheap shots at Stéphane DION over the federal Liberals' alleged plans to tax and spend Ottawa back into deficit.

If the CONSERVATIVES appeared to be suffering through an identity crisis, they were really calibrating their message for the next election - whenever it comes. Harper strives to look conciliatory on Afghanistan, an issue that divides voters in a way that gives his strategists sleepless nights. Similarly, his government can't afford to sound too hard-nosed on the environment, a file on which many Canadians tend to doubt Tory instincts. But a minority regime aspiring to win a majority needs issues to call its own, and the Conservatives see sound economic management, along with stern law-and-order legislation, as their best bets. "Some would have us go down the path to higher spending, higher interest payments and higher taxes," Flaherty said in his budget speech, "Our government is taking the path that requires focus, prudence and discipline."

That's rhetoric aimed at anxious Canadians who have been hearing that a U.S. recession is about to sideswipe their economy. To back up his concerned stance, Flaherty could point to two significant policies that might provide a bit of cushion during a downturn. Both, though, were announced well before the budget, so they didn't make much of a splash on Flaherty's big day. Last fall's mini-budget brought in business and personal tax cuts that add up to $12.3 billion in 2008-09, substantial stimulus for those who believe a Keynesian shot in the arm can help the economy through a slump. Then, in January, the Prime Minister announced a $1-billion fund to support communities that rely on hard-hit "traditional" industries like forestry, a compassionate program for smaller cities and towns that, incidentally, tend to vote Tory.

But that's about it for big measures that have much to do with the current economic unease. That doesn't mean, however, that the rest of the budget wasn't worth reading. In fact, the real story of Flaherty's third try at drafting a federal fiscal plan had surprisingly little to do with impending, short-term economic weakness and much more to do with extending and exploiting Canada's remarkable sustained run of economic strength.

Consider some of the biggest-ticket items in what was, admittedly, a modest budget when it came to new spending. Most economists say infrastructure is a key to long-term prosperity, and the budget commits $500 million to support public transit. It also extends the so-called Gas Tax Fund, which provides municipalities with billions for roads and transit, waterworks and sewage treatment. Every economist worth his board-of-trade breakfast speech fee also touts the need to educate smarter workers for cutting-edge industries, and the budget pumps about $1 billion over three years into "people" and "knowledge," which largely means universities and students.

In cheerier times, any finance minister would have taken a few items like those and wrapped then up with a sunny slogan about innovation or excellence or the "knowledge economy." But Flaherty was too busy warning about "meeting the challenge of global economic uncertainty" (gulp) for much of that sort of upbeat talk. Yet most of this budget - and arguably most Tory tax and spending policy that came before it - is shaped by the extraordinarily strong economic situation Harper's government was elected into in 2006, rather than by this year's more worrisome outlook.

Flaherty predicted that Canada's economy will grow more slowly over the next two years. Still, that's after a steady run of remarkable prosperity and undeniable progress since the federal deficit was erased. As Dale Orr, an economist with the consulting firm Global Insight, points out, Canada's per capita gross domestic product, the broadest measure of all the goods and services produced, surprised forecasters - including him - by expanding 26 per cent over the past 10 years, outpacing even the robust U.S. GDP growth of 20 per cent per capita over the same period. That meant the average Canadian's standard of living last year was 84.4 per cent of the average American's, up nicely from 82 per cent back in 1997. Canada's unemployment rate is at a 33-year low and, in sharp contrast to the U.S., Flaherty was able to credibly boast this week that Canadian household and business finances are in good shape by international standards.

Overall, it's an enviable situation for any finance minister to find himself in - except for the politically inconvenient fact that he inherited it all from the Liberals. That leaves Flaherty in a position where he needs to maintain momentum on fundamentals, while altering the mix of policies to put a Tory spin on that continuity. His answer: measures like the 2008 budget's signature tax twist, the Tax-Free Savings Account. Flaherty called it "the single most important personal savings vehicle since the introduction of the RRSP." Taxpayers will be allowed to contribute up to $5,000 every year to a registered account, carry forward any unused room to future years, and pay no tax on the investment income those savings earn. Unlike an RRSP, which is about saving for boring old retirement, Canadians will be able to empty the new accounts tax-free to buy a house, splurge on a car, or, as Flaherty put it, "to simply treat themselves."

It was as close as he came to trying to disperse those gathering economic clouds. The way the Tax-Free Savings Account concept lends itself to the politics of budget-making is in keeping with a raft of other Tory tax cuts from past budgets. The $2,000 tax credit for every child in every family, the fitness tax credit for kids signed up for sports, income-splitting for seniors on pensions, even the two per cent cut in the GST - all these measures are designed to make tax cuts as tangible as possible. They are easy to remind folks about in a campaign-trail speech.

Focused tax breaks stand out in much sharper relief than the broadly based cuts introduced by the Liberals in 2000, or for that matter, the across-the-board personal and business tax reductions Flaherty himself announced in last fall's important mini-budget. But criticize niche measures, and he has his comebacks ready. "Some say we should not have provided tax relief for individuals, families, workers and seniors - they call it blowing the surplus," he said. "It takes a certain kind of Ottawa politician to view giving people their hard-earned money back as blowing the surplus."

In fact, Liberals have limited their criticisms of Tory tax measures pretty much to the two points they've shaved off the GST, at a cost of $12 billion a year to the federal treasury. Even the Liberals declare they would not attempt to raise the rate again above its current five per cent. That doesn't stop Flaherty from darkly alluding to unnamed "misguided" forces who might impose "higher taxes, perhaps even an increase in the GST."

Beyond the optics of easy-to-understand tax breaks like the Tax-Free Savings Accounts, it's increasingly hard to see fundamental differences between the Tories and Liberals on core economic policy. Both are for broad tax cuts, no deficits and a mix of policies to promote universities and build infrastructure. "Under the circumstances," Dion sniffed in declaring he wouldn't fell the Harper minority over Flaherty's plan, "I don't see enough in this budget that would justify that we precipitate an election that Canadians do not want for now." He called the budget "one mile wide and one inch deep," a reference to its many modest measures but lack of an anchoring tax or spending plan of real heft. Rather than slamming the budget, Liberals pointed to proposals of theirs they say the Tories picked up, from making the Gas Tax Transfer permanent, to supporting the auto sector, to investing in transit and infrastructure. It was left to the NDP's Jack LAYTON to blast the Tories for "failing working families," and the Bloc Québécois' Gilles DUCEPPE for not doing enough for Quebec forestry and manufacturing. Both said their parties would vote against the budget. No surprises there.

What mattered, though, was the Liberal support, lending another lease on life to Harper's already surprisingly long-lived minority. The many pundits and political insiders who had predicted either Afghanistan or the budget was bound to trigger a spring election were surprised. But Conservatives and Liberals have been sending signals that they would prefer to fight on other issues. The Tories have been talking up anti-crime legislation at every turn, not bothering to disguise their attempts to goad Liberals into a confrontation. As for the Liberals, Dion ignored both Afghanistan and the budget early this week, launching question period with hard-hitting questions on the environment. Two potential election tripwires have been skirted. Others, it seems, are being put in place.

See also FISCAL POLICY; BUDGETARY PROCESS.

Maclean's March 10, 2008