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"Irresponsible" federal budget caters to special interests and leaves future taxpayers with a legacy of debt

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Release Date: January 27, 2009

VANCOUVER, BC- Today's federal budget turns back the clock on Canada's past sound fiscal management and sets the nation back down the path of massive deficits and increased debt, said Niels Veldhuis, Fraser Institute senior economist.

"This budget is simply irresponsible given Canada's current economic climate. Massive increases in government spending and $85 billion in deficits over the next five years will do little, if anything, to boost economic activity and instead will saddle Canadians with higher taxes in the future," Veldhuis said.

"The government has caved in to the special interest groups lining up in Ottawa with their hands out for federal cash. This budget will do little in the way of improving the economy and sends a negative signal to the real generators of economic activity: skilled and talented Canadians, entrepreneurs and successful businesses."

From 1997/98, the year the federal government balanced its budget, to 2007/08, the federal government ran budget surpluses and reduced its debt by $105 billion.

"Canadians are still paying for the legacy of past federal deficits with 13 cents of every dollar in revenue still going to pay interest on the existing debt. With a nearly $85 billion increase in debt proposed in this budget and interest rates that are likely to rise, this budget will significantly increase the debt burden for the next generation," Veldhuis said.

"Stimulus" Spending Doesn't Work

The 2009 budget contained a massive, $28 billion increase in government spending over the next two years (2009/10 and 2010/11) to "stimulate" the economy. The increase in spending is an attempt to appease nearly all special interests including seniors, aboriginals, farmers, the auto industry, forestry, tourism, arts and culture.

To finance this spending, the government must borrow nearly $85 billion, meaning the government will take money from some Canadians (those buying government bonds) who will have less to spend and/or invest in the private market. The end result is the government merely shuffles money around from one group of Canadians to another, rather than increasing overall economic activity.

"With these spending initiatives, the government is merely transferring money from some Canadians to special interest groups. This will not increase economic activity," Veldhuis said.

Tax Relief

One of the budget's major disappointments is the lack of permanent broad-based relief, Veldhuis said.

"Of the $11.9 billion provided in tax relief over the next two years, only $3.8 billion is permanent and broad-based. This is in comparison to the total stimulus package of $39.9 billion, a meagre 10 to one ratio."

The majority of the tax relief offered mirrors the spending increases by targeting select groups and preferred industries. It includes a host of new or expanded tax credits such as the new Home Renovation Tax Credit, a First-Time Home Buyers' Tax Credit, an extended Mineral Exploration Tax Credit and an increased Age Credit.

"Unfortunately, $3.8 billion in permanent broad-based personal income tax changes (including the small increase in the basic personal exemption and the increase in the threshold for the bottom two personal income tax rates) will do almost nothing to help the economy," Veldhuis said.

"The government could have achieved better economic results by dropping middle and upper personal income tax rates which would have reduced the burden on highly skilled, talented and creative people and improved the incentives for increased work effort, investment and entrepreneurial risk taking."

Infrastructure

The centre piece of the government's "stimulus" package is the $11.8 billion in new infrastructure spending over the next two years, including a $4 billion Infrastructure Stimulus Fund for provinces and municipalities, $2 billion to support repairs and maintenance and accelerated construction at colleges and universities, $515 million for First Nations Infrastructure, $500 million for recreation facilities, $500 million for projects in small communities, and $400 million for the Green Infrastructure Fund.

"While Canada's infrastructure certainly needs improvement, increased infrastructure spending will do little to stimulate the economy. Infrastructure initiatives are rarely "shovel ready" and those that are, aren't necessarily the ones that will provide the greatest economic return," Veldhuis said.

Regional Economic Development and Bailouts

The budget also contained billions of dollars for specific regions and industries including:

  • $4 billion for the previously announced bailout for the auto industry
  • $1 billion Community Adjustment Fund for rural towns
  • $335 million for culture and arts
  • $140 million for tourism
  • $500 million for agricultural
  • $170 million for the forestry sector
  • $1.0 billion for a new southern Ontario development agency
  • $1.0 billion to support clean energy technology

"Yet again, the federal government is relying on failed activist economic policies that will only delay the day of reckoning for these troubled industries. The government should have used these resources to create the right investment climate and environment for all businesses to succeed," Veldhuis said.

"All in all, this entire budget was an enormous missed opportunity. If Finance Minister Jim Flaherty truly wanted to have a positive impact on the Canadian economy, he should have reduced government spending, eliminated the capital gains tax, and aggressively decreased personal income and business taxes."



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