Canada’s 2012 Budget: Does It Deliver, or is It Full of BS?

The Centre Block on Parliament Hill, containin...

The Centre Block on Parliament Hill, containing the houses of the Canadian parliament (Photo credit: Wikipedia)

Canada’s Economic Action Plan 2012 is out! Did the new budget cut as much as some people feared? Did it cut enough? Are we on a path toward sustainable government and responsible spending levels? Read on and find out more.

First, to get an idea of what Canada’s spending is like, let’s review actual spending for the 2010 budget, the last budget we have complete numbers for:

A review of the 2010 budget

Where did your tax dollar go in the fiscal year ending March 31, 2011? Here’s a break-down:

Transfer payments: 58 cents.

Government operating expenses: 30 cents.

  • Defence: 8 cents.
  • Public safety: 3 cents.
  • Canada Revenue Agency: 3 cents.
  • Other operations: 12 cents.
  • Parliament: 1/4th cent.
  • Crown corporations: 4 cents.

Public debt charges: 11 cents.

And where did the money come from?

  • Personal income tax: 48 cents.
  • Corporate income tax: 13 cents.
  • Sales tax: 12 cents.
  • Excise taxes and duties: 8 cents.
  • Employment Insurance premiums: 7 cents.
  • Other revenue: 12 cents.

Total spending: $270.5 billion (15.7% of GDP)
Deficit: $33.4 billion (2% of GDP)
Gross Domestic Product, 2011: $1,719 billion

Canada’s Action Plan 2012

Now, let’s take a look at the new budget for 2012. It’s projected that the total deficit for this budget will be $21.1 billion.

Old Age Security

There were rumours that Canada’s Old Age Security benefits were going to be clawed back. Well, the rumours are true!

Just as a recap, what is the Old Age Security (OAS) and the guaranteed income suppliment (GIS) programs?

From my OAS article:

Old Age Security (OAS): This is a form of financial assistance for retirees aged 65 and older, who have lived in Canada for at least 10 years. The money is allocated based on time in Canada; those who have been in Canada for at least 40 years will get the full payment, while those who have been in Canada for less will get a fraction of the payment. For example, someone who has been in Canada for 20 years would be eligible for an OAS payment of 20/40 or 50% of the amount.

The average payment is $508.35/month as of October 2011, however, those who have saved and invested for themselves and have a good income must repay part or all of their OAS benefits. Those who make at least $69,562 must start paying back part of the benefit, and those who make more than $112,772 must pay back the full amount. More information can be found on the government website.

Guaranteed Income Supplement (GIS): In addition to OAS, the government also provides a guaranteed income supplement for those with low income. The payment starts declining at an income of $16,368, and stops entirely at an income of $39,264.

Keep in mind that these programs are not pension plans: in addition to these programs, Canada also has the Canada Pension Plan (CPP), and Quebec has their own plan, the Quebec Pension Plan (QPP). These plans are funded by direct contributions from your paycheck.

Here are the basic changes:

You are 54 years or older: no effect.

45 – 54 years: OAS and GIS benefits start between ages 65 and 67.

45 years or younger: OAS and GIS benefits start at age 67.

One of the reasons for this is the explosion in costs projected down the line: costs are estimated to rise from $38 billion in 2011 to $108 billion in 2030. That is a compound annual growth rate of 5.65% in costs, and someone’s going to have to pay for it. Guess who it’ll be? Check out this chart:

Ratio of Working-Age People to Seniors. Source: Economic Action Plan 2012

Ratio of Working-Age People to Seniors. Source: Economic Action Plan 2012

There’s only going to be around 2 working adults per retired adult by 2030.

However, I don’t really agree with this kind of a change. Why are people making $70,000 receiving welfare from the government? At the same time, in order to receive benefits you now have to wait until age 67. Otherwise, too bad, go work at McDonalds or whatever you can get! Notwithstanding possible massive increases to quality of life at age 65, it would have made a lot more sense to implement the clawback in terms of income rather than in terms of age.

Goodbye, Penny, and so long

With ongoing inflation caused by the Bank of Canada, I guess we had to expect this sooner or later. “A penny for your thoughts”, “A penny saved is a penny earned”, “My two cents”, … time to come up with new expressions!

Here are some fun facts about the penny:

  • It costs the government 1.6 cents to produce each new penny.
  • The penny has lost 95% of its value due to inflation.
  • Digital pennies will still exist (the cent will still be around).

So while digital payments will continue to use cents, cash payments will be rounded up or down. This rounding will affect the final payment, after all taxes have been added to the price.

Goodbye penny… not everyone will miss you, but I will! You’re a symbol of a time when a penny was worth something.

Other changes

Responsible Resource Development

A few tens of millions will be thrrown into agencies, regulations, and research that deals with natural resources.

Supporting Entrepreneurs, Innovators and World-Class Research

This looks like around a good billion in funds will be allocated toward increasing private sector investments and supporting business development programs.

Jobs And Opportunities for Canadians

There will be a hiring credit for small businesses to be used against Employment Insurance (EI) premiums, as well as a youth employment strategy. There will also be plans to improve the labour market for older workers and Canadians with disabilities.

The EI program will also be improved by reducing the disincentive to work. Working while collecting EI will no longer reduce benefits dollar for dollar. They will now only be reduced by 50%. For more information on this pilot project, see Working While on Claim Pilot Project.

Overall picture

Several departments will see a reduction in the growth of spending (I refuse to call them cuts). These departments will receive the following reductions in spending:

  • Agriculture (9%)
  • Health (5.7%)
  • Heritage (5.7%)
  • Defence (5.5%)
  • Canada Revenue Agency (5.1%)

If that’s what the media calls deep cuts… and also, if you look at the actual figures, you can see that health spending is still increasing by several billion per year. In addition, government spending is going to increase over the next few years, and the revenue take is going to increase massively! Here are the figures:

Revenues, budget ending 2011: $237.1 billion
Revenues, budget ending 2017: $312.5 billion
Compound annual growth rate of 4.71%.

Expenditures, budget ending 2011: $270.5 billion
Expenditures, budget ending 2017: $304.7 billion
Compound annual growth rate of 2.00%

The government is on a track toward a balanced budget, but it will not be achieved through cuts. Instead, it will be achieved by a large growth in revenues. Not quite the same thing, but the media doesn’t tell you that.

Even if you were generous and allowed for inflation (which you shouldn’t, since the government gets to spend the money first, and I don’t believe that inflation seigniorage is counted as revenue!), expenditures are still flat. Flat != a cut in spending.

Dear reader, what are your thoughts on Canada’s Action Plan 2012? At least we’re on a track toward balanced budgets, which is better than sky-high deficits.

Sources

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4 Responses to Canada’s 2012 Budget: Does It Deliver, or is It Full of BS?

  1. 101 Centavos April 6, 2012 at 1:49 pm #

    Hah! And Canada is supposed to be way more financially prudent than the USA. I guess when American government finances look as bad as they do…
    Leviathan lives and breathes in the great white north, FG.

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