Commentary

March 28, 2004

Just How Prudent was the Federal Budget?

EST. READ TIME 4 MIN.
Hope among Liberals was that Tuesday’s federal budget would blunt the furor over the sponsorship scandal. To that end, the budget’s main focus was on responsible management of public monies and initial reactions were generally supportive of the budget’s cautious tone and nature. In fact, the descriptive used consistently in the media was ‘prudence’. Even the best and most skilled analysts however, have difficulty analyzing a 404-page budget document within three hours; as such, there is always the risk of missing important details. A closer examination reveals that Prime Minister Martin’s first budget as leader of the country is much less prudent than would first appear.

To the Liberals credit the budget did restore the inclusion of a Contingency Reserve Account of $3.0 billion and an Economic Prudence Account of $1.0 billion. Further, it also includes much smaller spending increases than previous budgets. Specifically, the budget calls for a $4.5 billion (3.1 percent) increase in program spending this year and an $8.2 billion (5.5 percent) increase next year. Both are well below then-finance minister John Manley’s 2003 budget which saw program spending increase $10.1 billion, or 7.6 percent.

Digging into the 404-page budget more deeply reveals some rather troubling details. First are the economic assumptions, an area where the Liberal Government has historically shown prudence. The Liberals pioneered the use of private sector forecasters to establish a framework for government economic assumptions. However, some of that prudence was removed in this year’s budget as the growth rates for the economy, namely 2.7 percent this year (2004) and 3.3 percent next year, have already been downgraded by most private sector economists. Instead of reducing their assumptions, the Federal government choose to rely on more optimistic forecasts.

Next, consider the announcement by the federal government to sell its remaining shares of Petro Canada, valued at between $2.0 and $3.0 billion, which in and of itself is quite sensible. Completely imprudent, and frankly unacceptable, is that the entirety of the proceeds is included in general revenues. In fact, without these proceeds the government would risk running a deficit. Instead of making tough and prudent choices about where to trim federal spending, the Liberals are taking the easy road and using the windfall to beef up general revenues. Given that the Liberals have made reducing national debt a priority, it is where the entirety of the proceeds should have gone.

Another area of concern is Mr. Martin’s ongoing “Innovation Agenda”. Since 1998/99, the federal government has committed $8.9 billion to innovation-related initiatives. The 2004 budget calls for an additional $270 million. However, neither the initial expenditures nor the proposed additions have been measured for success. That is, the federal government has not clearly articulated specific objectives for this spending. At the very least, the federal government should be providing measurement-based assessments of programs before increasing their budgets with more hard-earned taxpayer money.

To make matters worse, the federal government has created a $250 million fund for venture capital investment to be managed by the Business Development Bank of Canada. The notion that bureaucrats, either directly in the federal government or indirectly at Crown Corporations, can invest and allocate capital, particularly high-risk venture capital more efficiently and effectively than those that actually have a vested interest in the outcome of such activities flies in the face of all the revelations made recently regarding the operation of government.

Perhaps the most disappointing aspect of the federal budget, and perhaps where it lacks the most prudence, is with respect to productivity. Within the budget, the federal government readily admits that future increases in the standard of living will have to be based on productivity improvements. Given this admission, it is more than a little disconcerting to see few measures included in the budget to improve productivity. Other than the two minor tweaks to the system of incentives for investment and increased support for post-secondary education, very little was provided in terms of significantly reducing Canada’s relatively high effective corporate tax rates, a primary deterrent to increased investment and hence productivity.

As the media circus around the latest Liberal budget recedes, it will hopefully become evident that the Liberals have in fact changed very little. While the Liberals are certainly willing to talk prudence, their actions show they’re not all that serious.

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