Posted: Tuesday, 22 March 2011

Introduction

With unemployment and underemployment still at high levels, the federal government should have led the way to a sustained and broadly shared economic recovery. Instead, the Conservative Budget introduces only very modest new job creation and social spending measures, including a supplement to the Guaranteed Income Supplement for low income seniors, and a home energy retrofit program.

For unemployed workers, the Budget includes a one-year extension of two Employment Insurance pilot projects, and a temporary extension of existing and recently expired work-sharing arrangements. There is also a modest $4.5-million-per-year enhancement to the Wage Earner Protection Program.

Small business gets a one-year break on EI premiums if they expand jobs. Manufacturers get a two-year extension of the fast write-off for new investment in machinery and equipment, a targeted measure which could help boost real investment.

There are no major job creation measures such as support for municipal infrastructure investment, or child and senior care.

The hidden focus of the Budget is upon reducing an already modest deficit. Big spending cuts amounting to $4 billion per year are to take place over the next few years, though no details are provided on where the axe will fall. The Budget hints that these cuts will be used to fund further tax cuts.

What We Wanted

The CLC had called on the government to address three key issues in the Budget — Pensions, Employment Insurance, and Jobs.
Our priorities were to:

1. Overhaul our national pension system through a package of measures, including a doubling of Canada Pension Plan benefits and an increase in the Guaranteed Income Supplement to a level sufficient to eliminate poverty among the elderly in Canada.
2. Improve income security for unemployed workers, and help hard-hit communities by continuing and improving the special EI benefits and training measures which were introduced in the recession, but which have since expired.
3. Launch a major, multi-year, public investment program to create jobs and build a stronger economy, including support for public infrastructure development, expanded public services such as child and elder care, energy conservation, public transit, renewable energy projects, and support for industrial restructuring.

Pensions

The crisis exposed major faults at the heart of our pension system. Our public pensions — Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), plus the Canada Pension Plan (CPP) — are supposed to provide a secure income in retirement, but the maximum value of these public pensions falls well short of replacing the 50% to 70% of pre-retirement income needed to maintain living standards. Meanwhile, the private part of our pension system is in deep trouble.

The labour movement believes that Canadians should not have to “fend for themselves” in retirement. We welcome the fact that seven provinces have agreed to expand the Canada Pension Plan. The CLC has called for a doubling of benefits from 25% to 50% of average earnings, paid for on a fully pre-funded basis by a phased-in premium increase of less than 6% of earnings up to maximum pensionable earnings. The CPP provides a fully portable, inflation-indexed, defined pension benefit for life at a much lower cost than the “pooled registered pension plans” supported by Finance Minister Flaherty and the financial institutions which lobbied against CPP expansion.
The Budget speaks to “continuing work (by the federal and provincial governments) on options for modest enhancement of the CPP,” but does not indicate strong support for such an option. It talks about the need for consensus, not reaching the required CPP amendment formula of seven provinces with two thirds of the national population. It restates the government’s intent to proceed with the “pooled plans” with no new details.

The CLC called for an immediate increase in the Guaranteed Income Supplement of 15% to eliminate poverty among the elderly. This would cost about $1.1 billion.

The Budget introduces a supplement to the GIS to a maximum of $600 per year for single seniors, and $840 for couples. The maximum amount will go to those with less than $2,000 in income other than from OAS and GIS. Above these income thresholds, the amount of the top-up will be gradually reduced, and will be completely phased out at an income level (excluding OAS and GIS) of $4,400 for singles, and $7,360 for couples. The cost of the top-up to GIS, expected to go to 680,000 seniors, is $300 million per year.

Employment Insurance and Training

Special Employment Insurance income support and training measures were an important part of the Government of Canada’s response to the Great Recession, but have now come to an end.

These included an extra five weeks of EI benefits for all regular beneficiaries to a 50-week regional maximum, and a further extension of regular benefits for some so-called long-tenure workers. Access to special EI training benefits for extended training ended in May 2010.
Even at the peak of the recession, just over one half of all unemployed workers qualified for regular EI benefits, and even fewer women.
The CLC urged the government to continue the special measures put in place, including benefit extensions, flexibility for work-sharing arrangements, and use of regular EI benefits to support retraining of unemployed workers.

The Budget extends EI work-sharing arrangements already in place or recently terminated for up to 16 weeks at a cost of $10 million. The extension will be phased out by October 2011. It also announces a one-year extension of two EI pilot projects, which were due to expire this summer, at a total cost of $420 million. These are the projects which base benefits on the best 14 weeks of earnings in 25 high unemployment regions, and the Working while on Claim project which allows workers more flexibility to combine EI with temporary work opportunities. The CLC has called for both of these measures to be permanently in place, and to cover all unemployed workers.
The Budget gives a one-year EI premium break worth $165 million to small businesses which increases their payrolls in 2011 compared to 2010. Already-announced limits on the increase in EI premiums remain in place.

The Budget forecasts that the new EI Fund will return to balance by 2015, and promised consultations on EI premium setting will go ahead soon.

The Wage Earner Protection Program which covers unpaid wages in the event of bankruptcy (up to a maximum of $3,400) is enhanced to cover a longer period to protect employees hit by an employer’s unsuccessful restructuring, at an annual cost of $4.5 million. The Temporary Initiative for Older Workers, which helps unemployed workers in smaller communities, is extended for two years at a cost of $50 million.

With respect to training, the Budget announces a “Helmets to Hardhats” program in partnership with the AFL-CIO Building Trades which will train released armed forces personnel for jobs in the construction industry. There will be a tax break for examination fees for skills certification, and some small improvements to student loans and grants.

Jobs

To deal with the continuing jobs crisis, the CLC called for the federal government to launch, in partnership with the provinces and cities, a major, multi-year, public investment program which would create jobs now, promote our environmental goals, and build new “green” industries for the future. A comprehensive plan would cover: roads, sewers, and basic municipal infrastructure; health and educational facilities; mass transit; passenger rail; affordable housing; energy conservation through building retrofits; and renewable energy. Federal government support for all infrastructure and environmental investments should be linked to “Made in Canada” procurement policies so goods and services inputs are purchased in Canada. We also called for sectoral industrial strategies to assist restructuring.

The current infrastructure investment program — including the Infrastructure Stimulus Fund — made a significant contribution to recovery in the job market, but these investments were modest in scale, had an inadequate focus on green investments, and expired at the end of the fiscal year 2010-11.

The Budget makes a number of small announcements on job creating investment. There is a one-year-only extension of the ecoENERGY Home Retrofit program at a cost of $400 million as part of a suite of modest measures in support of clean and renewable energy.

There is no increase in federal support for municipal infrastructure, though the Gas Tax Transfer base will now provide a guaranteed $2 billion per year. (It could now fall below that base in the very unlikely event that gasoline prices fell sharply.)

There is a two-year extension of the fast two-year write-off for companies for manufacturers and processors who invest in machinery and equipment, at a total cost of $620 million. The CLC has supported such targeted measures as an alternative to unproductive broad-brush cuts to the corporate tax rate.

The Budget announces minor measures in support of the forest and aerospace sectors, and in support of research and development.
We also called for investments in child care and early learning, home care, and long-term care for the elderly which would create new jobs while promoting our social goals. Rather than expand public programs, the Budget announces small improvements to tax credits to a maximum of an extra $300 per year for family caregivers of infirm child and senior dependents.

Health and Social Transfers to the Provinces

The Conservatives did not announce any changes to transfers to the provinces in this Budget. Currently, health transfers to the provinces are growing by 6% per year, and the Canada Social Transfer is growing by 3% per year. The current formula for federal contributions to provincial social programs expires in 2013-14. A majority Conservative government would probably cut the rate of increase of transfers to force the provinces to cut public health care and to expand private health care.

Context: the Continuing Jobs Crisis

While the Canadian economy has begun to recover from the “Great Recession” in terms of the level of GDP and overall job growth, unemployment and underemployment still remain well above pre-ecession levels. The national unemployment rate in February 2011 was 7.8%, up sharply from about 6% before the recession, and there were still almost 1.5 million unemployed workers; 21% of the unemployed have been out of work for six months or longer.

Many of the jobs created in the recent recovery have been part-time and temporary. Statistics Canada’s broadest measure of unemployment, which counts labour force dropouts and involuntary part-time workers, stands at 11.7%. A near record one in five workers (19.7%) are now part-time, and the number of temporary workers has also been rising.

The Budget expects the unemployment rate to average 7.5% this year and 7.2% in 2012, well above the 6% rate reached in 2008 before the recession.

The Conservative Spending Cuts and Tax Plan

The Harper government’s priority before the recession was tax cuts. Federal taxes were cut from 16.2% of GDP in 2005-06 to 14.6% before the recession. In the fiscal year just ahead of us (2011-12), tax cuts introduced by the Conservatives will reduce revenues by at total of $37.5 billion, of which $10.5 billion come from corporate income tax cuts, and $13.2 billion come from the two-percentage-point cut to the GST. These are classic right-wing, “starve the beast” tactics which were intended to set the stage for spending cuts.

The general corporate income tax rate is now 16.5%, down from 22% in 2006, and far less than the U.S. rate of 35%. In January 2012, it will fall to just 15%. Despite past cuts to the corporate tax rate, real business investment did not rise as a share of our economy. Continuing cuts to the corporate income tax rate have been sold on the basis that they would boost investment in the real economy and create jobs. However, the lion’s share of the tax cuts go to the banks and to resource companies which already have high profits.
The Budget made no changes to planned corporate tax cuts.

The Conservatives responded to the recession by raising spending grudgingly and under pressure, both domestically and internationally. Deficit-financed stimulus measures taken in the 2009 Budget which continued into 2010 — especially investment in municipal infrastructure and somewhat enhanced access to Employment Insurance and training — had some positive impact in alleviating the full force of the Great Recession on working people and on hard-hit communities. But these measures have come to an end, and the focus is now on fiscal austerity.

Contrary to conventional wisdom, the federal government deficit and debt are not major problems.

The federal debt as a share of GDP was just 29.0% before the recession, one of the lowest levels among major economies. Despite three years of deficits due to the recession, the debt today still stands below the level of 2005-06, and is much lower than in Japan, the U.S., or major European economies. It will soon return to pre-recession levels.

The deficit is low and falling. It topped out at 3.6% of GDP last year, has been falling quite rapidly to a projected 2.5% of GDP this fiscal year, and is expected to fall to just 1.7% of GDP in 2011-12 due to the limited economic recovery which has boosted tax revenues. The deficit has fallen well below the projections in the last Budget, and is expected to be all but eliminated by 2014-15. It was much higher — about 5% of GDP — from the late 1980s until the mid-1990s. Moreover, interest rates on government debt remain near record lows (well under 4% per year on ten-year bonds). The deficit today exists more due to Conservative tax cuts than to the recession.

Despite the falling deficit, the Budget announces a total of $17.2 billion in spending cuts over the next five years, with a target moving forward of annual savings of $4 billion per year to reduce the debt and/or to fund further tax cuts.

To his credit, Minister Flaherty also plans to raise an extra $1 billion per year in revenues by closing tax loopholes mainly used by very high income Canadians (including senior executives with personal pension plans).

Introduced in 2007, Strategic Expenditure Reviews were originally characterized as a revolving cycle of departmental reviews reallocating 5% of expenditures from low-priority to high-priority areas within the department. By 2009, the Strategic Review exercise had evolved into a program designed to reduce departmental expenditures by 5% yearly.

The first four-year cycle of Strategic Reviews ended in 2010. By 2014-15, these reviews will have delivered a total savings of $8.5 billion.
In 2011, a new one-year, whole-of-government “Targeted Strategic and Operating Review” will temporarily replace the revolving Strategic Reviews. This new Review will deliver $4 billion (representing 5% of the review base) in yearly savings starting in 2014-15, and total accumulated savings of $11 billion by 2015-16.

As with the most recent 2010 round of the Strategic Review exercise, no indication whatsoever is given in the Budget of where the axe will fall. Observers will have to comb through the Main and Supplementary Estimates for department-specific details of the past review, and we do not know what the future program targets will be. Combined with the ongoing savings from 2007-10 Strategic Review process, total annual savings are forecast to be $15.5 billion by 2014-15.

Federal departmental operating budgets remain frozen for two years at their 2010-11 levels. In 2010-11, no increase in departmental envelopes was allocated to absorb the legislated 1.5% wage increase for federal public service workers, delivering savings of $300 million in 2010-11.

Conclusion

The jobs crisis is still very much with us. Our national debt is low, and interest rates are and will remain very low. The priorities in this Budget should have been pensions, jobs, and support for the unemployed, not spending cuts to reduce an already small deficit and to fund future tax cuts.

The CCPA Alternative Federal Budget shows that a major public investment program along the lines proposed by the CLC could improve services to communities and people, and quickly bring the national unemployment rate down below 7%. By putting Canadians back to work and paying taxes, the deficit would fall just about as fast as under the Conservative plan, and programs and services would be improved rather than cut.