This article was originally published in Maclean's Magazine on April 2, 2007
Tory 2007 Budget Leaves Business Feeling Neglected
Federal budget day produced at least one moment of sepia-toned nostalgia. It came when NDP Leader Jack LAYTON, eyes ablaze with old-school social-democrat outrage, declared his party would never vote for a budget that proved "the priority for the Conservatives appears to be those around the boardroom table, not the kitchen table." The line was a throwback to the days when editorial cartoonists drew Tories in stovepipe hats and bankers' vests. But budget '07 as a boardroom sop? In fact, Finance Minister Jim Flaherty had served his old pals on Bay Street mere scraps, left over when he was finished forking out billions to middle-income parents - the storied Tim-Hortons-soccer-mom-Canadian-Tire set, whose very mention triggers uncontrolled salivating among Conservative election strategists.
Precise statistics are hard to come by, but it's a safe bet that corner office plutocrats represent a somewhat smaller pool of voters in targeted Ontario suburban ridings than do modestly prosperous parents. So cynical eyes detected campaign fodder in Flaherty's announcement of a permanent tax break for parents with children under 18, a measure that will cost Ottawa $3.3 billion over its first three years. By comparison, his budget's top business tax break, a limited-time offer for manufacturers to write off equipment faster than usual, will put a piddly $735-million dent in the federal treasury. No wonder Nancy Hughes Anthony, president of the Canadian Chamber of Commerce, was unimpressed. "The accelerated writeoff for manufacturers is a good thing," she said. "But, frankly, from a business point of view, that was about the only thing that you could say would help in the productivity war."
War? Flaherty's upbeat budget speech made no mention of one. But in the business community and among experts who study competitiveness, many argue Canada should be fighting desperately to boost productivity. One disturbing indicator of how badly we're doing: Canada now generates $9,200 less in goods and services per person than the U.S., up from a $3,300 GDP per capita gap back in 1981 (corrected for inflation). Those sounding the alarm tend to fall into two camps. Economic conservatives argue Canada's economy needs lower taxes and less government spending to free up more of the country's wealth for productive investment. Innovation policy wonks call for more public spending on infrastructure, education, and research and development, along with policies to spur companies to rely more on brains and less on natural resources.
Flaherty's budget didn't mount a full-scale attack on either front. Instead, he poured money into family-friendly tax breaks, along with a huge increase in transfers to the provinces. There is no mystery about why these are Prime Minister Stephen HARPER's two main strategic priorities. Settling the so-called fiscal imbalance with the provinces, a big issue in Quebec, is meant to eat into the traditional Liberal franchise as the party of national unity. And in his methodical push to assemble a Conservative majority for the next election, Harper knows he needs to win over big swaths of traditional Liberal voters, especially in Ontario. Many of those potential voters will benefit from the new $310-per-child tax credit. "We made a choice," Flaherty said. "We chose to support hard-working families."
The Tories also chose to survive. If the pitch to parents was an investment in the next election, the package for provinces was a bid to delay it. Quebec is the big winner in the deal, in line to collect $9 billion in increased transfers over the next three years. So it was no surprise when Bloc Leader Gilles DUCEPPE promptly declared his MPs would vote for the budget. While bringing the Bloc onside, the budget sought to keep the Liberals and NDP off balance by spending a bit on a lot of easy-to-defend files. Climate change? No big plan, but a $2,000 rebate for buying fuel-efficient cars. Canadian culture? Nothing major, but $1.5 million for lacrosse and three-down football.
It's the family tax break, though, that Tories are counting on to make a lasting impression. After all, isn't relief overdue, since U.S. middle-income earners are supposed to be way better off? Actually, the gap tends to be bigger between rich Canadians and rich Americans, since income inequality favouring the wealthy is greater in the U.S. For families smack in the middle, the difference isn't so pronounced. Median family income for couples with children in both countries is about $70,000, measured in the home currency, although adjusted for what's called purchasing power parity, the U.S. family is still about 13 per cent ahead in terms of real buying power.
Still, even Flaherty's critics weren't lining up to say he needn't have helped out that demographic. It's just that, perched on a massive surplus, they thought he could also have delivered the sort of pro-business, pro-productivity stuff expected of a Conservative finance minister. "This was all tax measures for specific constituencies," Hughes Anthony said. "The fact that there was no broad-based tax relief was disappointing." John Williamson, federal director of the Canadian Taxpayers Federation, echoed that complaint, and pointed to a perhaps surprising model Flaherty should have followed - the five-year, $58-billion tax-slashing Liberal budget then-finance minister Paul Martin brought down in 2000. "The 2000 budget cut individual and business rates across the board," Williamson said. "They didn't just limit themselves to the middle, or just the bottom."
A Conservative strategist, who asked not to be quoted by name on the subject, said the terms "competitiveness" and "productivity" were all but banished from budget sales pitches. The very words are supposed to trigger fears among middle-class voters that what the government really has in mind is tough medicine for them, and benefits for big business and the wealthy. Indeed, advocates of across-the-board tax relief admit they do think cutting taxes on well-off people who tend to generate growth by investing is good economic policy, although maybe not good politics. "I recognize that voters aren't going to go for tax relief only for the top income earners," Williamson said. "That's why you need relief up and down the income ladder." Hughes Anthony makes the case in terms of recruiting, noting that while the top U.S. personal tax rate kicks in at $168,275, Canada's top rate, which is even higher, kicks in at $118,285. "When you are trying to attract a terrific doctor or a great academic," she says, "they look at those tax rates and say, 'Holy smoke!' "
Flaherty did earn praise from some leading voices lobbying for a productivity push. Roger Martin, chairman of the Institute for Competitiveness and Prosperity, awarded the budget high marks for investing 64 per cent of new spending in areas like education and infrastructure that should spur future growth, and less than most past budgets on current consumption, like health care and social services. Martin also approves of Flaherty's promise to set up a competitiveness experts' panel to study the issue. "It's signalling," he said, "that there's an understanding of the need for enhancing future prosperity." The panel is supposed to report by the time of next year's budget. Maybe by then, depending on the federal election cycle, the political moment will be right to for serious action.
THE TOP 10 EXPENSIVE ITEMS IN THE '07 BUDGET
1 New child tax credit $3.3 billion
2 Social transfers to provinces $2.9 billion
3 Equalization to provinces $1.9 billion
4 EcoTrust $1.5 billion*
5 Working income tax benefit $1.2 billion
6 Helping farmers $1.2 billion*
7 Faster writeoffs for manufacturers $735 million*
8 Infrastructure $650 million
9 Tax break for single-earner families $620 million
10 Patient wait times guarantee trust $612 million*
* one time
2006-07 through 2008-09 costs
See also BUDGETARY PROCESS.
Maclean's April 2, 2007