Budget 2000: What's there, what's not there

By Walter Robinson
web posted March 6, 2000

After reading all 350 pages of Paul Martin's seventh budget, a more sober analysis of its contents and effect on taxpayers is warranted. The budget is a good start for long-suffering taxpayers, but much more needs to be done.

What's There: Tax relief for individuals and businesses, and lots of it. From personal tax cuts to corporate tax cuts, a variety of measures are proposed.

But by far, the most positive step in this budget is the restoration of full-indexation (retroactive to January 1, 2000) to the tax system, eliminating the 14-year scourge of bracket creep which allowed federal and provincial governments to steal a combined $90 billion from the pockets of hardworking Canadians.

Sadly, we'll never get this back. Although we do find solace and claim some victory in the fact that Canadians will not be subjected to an extra $18 billion in cumulative bracket creep taxes over the next five years. Hundreds of Canadian Taxpayer Federation media appearances combined with tens of thousands of petitions, letters and emails to the Finance Minister ensured that the message was heard to end bracket creep.

This is the most significant measure of tax reform in over a decade and is to be applauded. This also forces provincial finance ministers to follow suit. Indeed Alberta will index their tax system to inflation starting in 2001 and Ontario is musing about the same approach. Rest assured that CTF staff will keep the pressure on all provincial governments to re-index their tax systems to inflation.

Some other measures in Budget 2000 on the personal income tax relief side include:

-- Lowering the middle income tax rate from 26 to 24 per cent on July 1, 2000 on its way to 23 per cent by 2004;
-- Raising the basic personal exemption (BPE) to $8,000;
-- Raising the middle and high income tax bracket thresholds to $35,000 and $70,000 by 2004;
-- Ending the 5 per cent surtax for incomes from $65,000 to $85,000 effective July 2000, with a complete phase-out of the surtax by 2004; and
-- Reduction of the capital gains inclusion rate from 75 per cent to 66 per cent.

The feds claim they are cutting taxes by a cumulative $58 billion over five years as follows (in billions):

Personal income tax
Corporate income tax
EI reductions

This figure is misleading. $18 billion is due to ending bracket creep. To add this to the personal tax relief measures is like promising to hike taxes by $10 billion, then cut them by $5 billion and claiming $15 billion in tax cuts. It doesn't wash.

On the EI front, the feds have assumed annual 10-cent reductions per employee (and 14-cents per employer) in premiums for each $100 earned. Fair enough, but we must also factor in CPP increases to this equation to 2003 which will cumulatively cost us another $14 billion over the next three years.

The bottom line is that we're looking at about $8 billion in real personal tax reductions and another $4 billion on the corporate side. The government claims that this is the “minimum” they will do. Darn right it's the minimum. Ottawa continually underestimates its surpluses and it will surely have room to cut more taxes next year as revenues continue to flow into the treasury.

Mr. Martin followed our pre-budget recommendations on bracket creep and the middle income tax rate reduction. Next year he can go further by reducing the lowest and highest tax rates by 2 per cent, reducing the middle rate again by 1 per cent as well and eliminating the 5 per cent surtax for all income earners, not just those under $85,000.

What's Not There: While the feds were quick to put the best spin on their tax relief, one has to dig deeper to get the true spending picture.

Last December, the feds were running a surplus of $10.9 billion for the first nine months of 1999/2000. But a combination of late spending announcements, revenue transactions and an extra $4.5 billion of spending announced in budget 2000 but booked in 1999/2000 (instead of 2000/2001), Ottawa has managed to hide $7.9 billion of surplus revenues with the remaining $3 billion going to the contingency reserve.

So we could have been in line for greater tax relief if the spenders hadn't got their hands on our money. The situation gets worse when one factors in the government year-end estimates released just days after the budget. Program spending (with debt servicing charges) is estimated to hit $157 billion for 1999/2000, a full $3.3 billion more than estimated at the beginning of the year even though debt servicing charges have dropped by $1 billion and EI payments are down by $1.5 billion.

Also, it appears that Ottawa hasn't learned a single lesson from the HRDC Shovelgate fiasco. After factoring out CPP and EI programs, HRDC's program spending is forecast to increase by $500 million from $2.3 billion this year to $2.8 billion in 2000/2001and then it jumps another $200 million to $3.0 billion by 2001/2002. You have to wonder where the money will go? Will it be more boardwalks to nowhere or grants given to build Wal-Marts and Dairy Queens?

Even when debt servicing costs are factored out program spending is forecast at $116 billion for 2000/2001 then it jumps by $5.5 billion (at a minimum) in 2001/2002 to $121.5 billion. To be fair, Minister Martin warned us last November in his Economic Statement that spending would rise with inflation and population growth. But this hike is much more than inflation plus population.

The government is using the surplus of over-taxation revenues to ramp up spending instead of reallocating within existing budget envelopes to meet priority program needs.

Apart from increased spending, debt reduction – or the lack thereof – is the other big black mark in Budget 2000. Ottawa has opted to grow its way out of debt by holding out declining debt-to-GDP ratio as its best strategy to reduce the $576.8 billion debt.

While it is true that the debt-to-GDP ratio has declined from a high of 71.2 per cent in 1995/1996 to 64.4 per cent this year, this is more a function of the growth of our economy (slated to top $1 trillion next year) than a testament to pay down net debt.

Paul Martin's strategy is akin to an ordinary taxpayer going to the bank and telling his banker not to worry about his big mortgage, maxed out line of credit and mounting credit card bills because he's expecting a 20 per cent raise next year which will make the relative size of his debt smaller when compared to his salary. The bank manager would say, “I don't give a rootie poo what sort of raise you're expecting, pay your bills now and get out of debt fast.”

Yet the feds continue set aside a paltry $3 billion per year for debt reduction, if and only if, it's not needed for spending. Meanwhile, we continue to pay $42 billion a year ($115 million a day) in debt servicing charges. Next year, 26-cents of every tax dollar sent to Ottawa will be wasted on debt interest. And at the government's present pace, it will take over 150 years to pay down the debt. This is intergenerational tax evasion on the backs of future taxpayers.

Budget 2000 passes when it comes to taxes, but remedial work is needed when it comes to expenditure management debt reduction.

Walter Robinson is the Federal Director of the Canadian Taxpayers Federation.

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