Liberal government’s first budget largely avoids difficult decisions
The difference between campaigning and governing is that the latter requires real decision-making and trade-offs. The recently elected Liberal government presented their first budget yesterday and in doing so revealed their preferences for both governing and decision-making.
Much of the budget is characterized by a lack of difficult decision-making of how best to prioritize current spending, which was a hallmark of the Chretien era. That is, the government largely did not decide to reform or cut low-priority spending or ineffective programs. Instead, it simply chose to increase overall spending. Indeed, the budget calls for a $20.5 billion increase in program spending this year, which represents a 7.6 per cent increase on top of marked increases in spending last year.
In addition, these spending increases were not financed by higher taxes, which at least better match the benefits of new spending with their costs. Rather, the new government decided to borrow and incur debt to finance current spending. Specifically, the government has proposed running a $29.4 billion deficit this year, almost entirely driven by new higher spending.
One laudable aspect of the budget was the increase to the top-up provided to low-income seniors through the Guaranteed Income Supplement (GIS). The government proposes to increase the benefit by up to $947 annually to the most vulnerable seniors with a total cost estimated at $670 million annually.
Few would disagree with the goal of ensuring that seniors are protected from dire poverty, particularly those that don’t have employment opportunities or savings from which to draw.
The insight into the preferences of the governing Liberals is how they decided to finance this worthy reform. As we pointed out several years ago in a study evaluating the Old Age Security (OAS) program, substantial savings are available from better targeting OAS benefits. The entirety of the cost of the enhanced GIS benefit noted above could have been financed by better targeting OAS benefits.
Specifically, OAS benefits are provided to individual Canadians over the age of 65. The OAS provides a flat-rate benefit to eligible Canadians of $570 per month. The key, however, is the income at which seniors are eligible for the benefit. In 2015, seniors received full OAS benefits as long as their annual income was below $72,809. Seniors received partial OAS benefits if their individual income was between $72,809 and $118,055.
OAS benefits and the clawback that reduces the benefits is calculated on individual income, which means that a senior couple could earn up to $145,618 and still receive full OAS benefits in 2015. Further, senior couples with income up to $236,110 (2015) could receive partial OAS benefits.
A decision to better target OAS benefits to seniors in need, which entails lowering the threshold within which seniors receive full benefits would free up additional resources. Our recommendation was to integrate the threshold for OAS eligibility with the threshold associated with the Canada Pension Plan (CPP)—roughly $53,600 in 2015. Such a change would save roughly $1 billion per year.
Governing requires difficult decisions and managing trade-offs. The previous Liberal government led by long-serving Prime Minister Jean Chretien was masterful at setting spending priorities and living within their means. The first budget of the Trudeau Liberal government has largely avoided the difficult decisions of setting priorities and living within their means. At some point, however, this government, like all governments will have to make difficult decisions and may come to regret some of the policies enacted in this budget.
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