The Budget and Other Mythologies

I am back from the sunny south. 

I remember being in lockups on budget day so that state secrets would not be leaked to the avaricious business community.  I also remember taking a significant part in the budget of 1984 as a consultant to the deputy minister of Department of Finance.  I therefore had an outside and insider's look at the budget process that you might find interesting.

The budget is made up of two or even three components.  First, there is the big picture.  This is the economic component of the budget that signals the government’s fiscal intent in the next year.  The second component is the “goodies” and “baddies” part of the budget that tries to fine tune existing provisions to the detriment or benefit of certain taxpayers.  Lastly there is the remedial part of the budget that tries to fix what is called “loopholes” in the legislation.

It appears to me that this budget was drafted knowing that it would never see the light of day as legislation.  There were obvious sops to the NDP.  The signs that government was to take on a much smaller dimension was offset by a tax gift to corporations that is sure to be translated to large party gifts from industry for the upcoming election.  The $300 tax credit to children participating in the arts is laughable.  The $3,000 tax credit to volunteer firemen seems excessive.  It was all for show.

However, the provisions aimed at plugging a “loophole” regarding flow through shares is interesting.  This loophole reduced the after tax cost of making a charitable gift to about 15 cents on the dollar This government has never been big on the arts and culture of the nation.  The flow through share mechanism did two things that seemed beneficial to Canada.  First, it funneled money into the extractive industries.  Many millions of investment dollars went to create jobs in the mining sector.  Second, it funneled money into the arts and other charities on a highly tax subsidized basis.  With the remediation of the so called loophole there will be a considerable swing of funds away from mining, the arts and other charities.  What appears strange is that this process was sanctioned by letters from CRA indicating that the process was quite legal and within the provisions of the Income Tax Act.  What changed the government’s mind?  No one knows for sure.  If you love the arts or hold mining stocks don't vote Conservative.

The other economic indicator that is worrisome is the stated aim to reduce the size of government.  There are several belt tightening provisions that require a freeze on hiring and the requirement that the departments do more with less. Shades of the Tea Party in the US. Having lived this long in the capital of Canada I know that government reduction plans are doomed to failure.  These usually result in the outsourcing of work that is hidden somewhere in departmental budgets.  Governments grow because they are tasked with more and more work as programs expand.  True that there could be significant efficiencies in government but, unlike the US, our government faces unions at almost every level that have the effect of perpetuating inefficiencies.  Like it or not, that’s the way it is.  Outsourcing makes the departmental spending process less transparent.  So why has the Conservative government participated in this pretense?  Its good politics.  It shows fiscal prudence that everyone knows is a sham. 

So, we’re in for another election.  More about that in a later post.