Budget 2007 in Review

Proposals that impact taxpayers' pocketbooks directly.

With political leaders criss-crossing Canada in what amounts to an election in all but name, it is not surprising to see that Budget 2007 is aimed at enhancing the Conservative Party's allure at the polls. And with a healthy budget surplus on the books, there is ample scope for showering favours upon the land.

As is usual for budgets from minority governments, what may be politically astute for a governing party may not be not be economically healthy for the country. For example, economist Dale Orr of Global Economics bemoans the escalation in equalization and other payments to the provinces. Sustaining the level of public services in less well-off regions interferes with the movement of labour and capital to their most productive use within Canada.

Is this a doomed budget, one that will precipitate an election? The Conservatives just need the support of one opposition party for it to pass, and they may have it from the Bloc Québécois thanks to the massive allocation of funds to the provinces, and in particular Quebec. What may instead trigger the election is other legislation in the works such as Conservative's crime bill scheduled for a vote near the end of March.

Let's begin with a summary review of proposals that impact taxpayers' pocketbooks directly. Then I'll follow up with a review of sections in the budget dealing with priorities that attracted major funding and are crucial to the outcome of an election that could soon be upon us.

Tax relief for families

The budget will directly impact Canadian's wallets in many ways, including:

•Registered Education Savings Plans to be made more attractive by scrapping limit on annual contributions, increasing lifetime limit to $50,000, raising the Canada Education Saving Grant from $400 to $500 per year, and extending eligibility to more part-time studies

•Under the Tax Fairness Plan, seniors are to benefit from an increase in the age credit amount by $1,000 to $5,066, and by allowing pension splitting

•A new $2,000 child tax credit to provide up to $310 per child of tax relief

•Age limit raised from 69 to 71 for converting an RRSP to a RRIF to strengthen incentives for older Canadians to work and save

•Increase in the spouse amount to the same level as the basic personal amount, providing up to $209 in lower tax to a parent earning little income.

•A Registered Disability Savings Plan to help parents and others save for the financial security of persons with severe disabilities

•A Working Income Tax Benefit of up to $1,000 for low-income families and individuals to increase incentives to stay off welfare rolls

•Elimination of capital gains tax on publicly traded securities donated to private foundations

•The Tax Back Guarantee plan will cut personal income taxes in line with the interest payments saved on the portion of government debt reduced in a year


“Canada is the most beautiful country in the world, and it is our responsibility to protect it,” says the Budget 2007 by way of introduction to the $4.5 billion in investments announced for cleaning and protecting the environment. Of that amount, $1.5 billion goes to the Canada ecoTrust for Clean Air and Climate Change, a program that will help the provinces reduce greenhouse gas emissions by phasing out coal-fired generating stations in favour of hydroelectric power stations, pumping carbon dioxide underground ? to name a few of the measures.

Getting gas guzzlers off the road is an obvious priority. The budget includes a new rebate of up to $2,000 for the purchase of a new fuel-efficient vehicle and a “Green Levy” on new fuel-inefficient vehicles. Two billion will be set aside over seven years to encourage the production of renewal biofuels such as ethanol. NDP demands were accommodated by the proposal to phase out the accelerated capital cost allowance for oil sand companies.

In partnership with the Nature Conservatory of Canada and other environmental groups, the Conservative Party is committing more than $250 million in the budget to preserving ecologically sensitive areas. Much of this amount will go toward more effective implementation of the Species at Risk Act, protection of boreal forests, and a 50% increase in the number of environmental enforcement officers.

Lastly, there is a new National Water Strategy. Highlights include over $40 million for cleaning up lakes, improvements to water and wastewater infrastructure, and $324 million to buy six patrol vessels for the Canadian Coast Guard.

Fiscal balance

As expected, the budget takes full aim at the “fiscal imbalance.” This is the notion that federalism is getting out of kilter as the federal government piles up budget surpluses while many provinces struggle to balance their books and provide public services. There are political point to score here, especially in Quebec where the lion's share of the new transfers are to go and Jean Charest's Liberals head into the last week of an election.

Nearly $40 billion over the next seven years is allocated, of which 40% represents spending on infrastructure projects such as roads, public transit, bridges, and sewer systems. Equalization payments are to be boosted by more than $1.5 billion in fiscal 2007-2008, post-secondary education is to get an extra $800 million annually, and labour market training will receive $500-million in new and long-term funding.

An attempt to deal with Ontario's grievances were addressed with a commitment to cap the formula for estimating equalization payments. With the cap, recipient provinces shouldn't end up with higher fiscal capacities than non-recipient provinces. The budget also adopts a 10-province standard and excludes 50% of natural resource revenues from the calculations of fiscal capacity, which may partially appease Saskatchewan and other resource rich provinces.

To supplement tax credits to businesses that create child care spaces, the Conservatives propose annual transfers of $225 million to the provinces and territories for the creation of child care spaces There is also a commitment to equal per capita cash support for the Canada Social Transfer and Canada Health Transfer programs.

Debt Reduction

Budget 2007 plans to pay down government debt by $3 billion annually in the next two fiscal years. Interest savings henceforward, as mentioned, will be returned to Canadians under the Tax Back Guarantee plan ? resulting in over $1 billion a year in personal income tax reductions, say budget documents.

Health Care

The Canada Health Transfer will rise by $1.2 billion. There is $400 million for development of health records as a first step toward measuring patient wait times, up to $612 million to support hospitals making commitments to establish patient wait time guarantees, and $300 million for a vaccine program to protect women against cancer of the cervix.

Business Relief

Farmers are to be awarded an immediate one-time payment of $400 million to cover rising costs of production and a subsequent $600 million to help build a new savings account program in conjunction with the provinces to improve upon the Canadian Agricultural Income Stabilization program. Other benefits for business include:

•Reduction in the tax compliance burden on small businesses by decreasing filing requirements and frequency of remittances

•Incentives to invest in manufacturing and processing equipment (50% straight-line write-off on new investments)

•Increases in capital cost allowance from 4% to 10% on buildings used in manufacturing and processing

•Lifetime capital gains exemption for farmers, fishers, and small business owners raised to $750,000 from $500,000

Defence and Public Safety

The Conservatives want to accelerate the Canada First defence plan so that the Canadian Forces will get $175 million this year. Another $200 million is earmarked for reconstruction in Afghanistan and another $115 for vaccines to inoculate the world's poorest peoples. Other priorities include:

•$64 million over two years to crack down on gangs and combating illegal drugs

•$6 million to RCMP to protect children from sexual exploitation

•$80 million over two year to the Canadian Security Intelligence Service

Research and Development

In addition to the increased funding for post-secondary education, Budget 2007 provides an additional $1.3 billion to promote scientific and technological innovation. Combined, the new spending on research and development will go to, among other places:

•$350 million over three years for Centres of Excellence in Communication and Research

•$510 million for Canada Foundation for Innovation

•$35 million for new graduate scholarships

•$120 million for CANARIE (a next generation research broadband network)

•$100 million for Genome Canada

So what's missing and likely to disappoint? For one thing, there was much talk about the Conservatives honouring their election promise to do away with the capital gains tax (if profits are reinvested after six months). It appears the Finance Minister was unable to solve the implementation obstacles to include it in the budget. As well, the GST cut to 5% will be postponed and a rumoured reinstatement of the Liberal's 0.5% cut in personal income tax rates (lowering the lowest rate to 15%) did not show up.