C.D. Howe Shadow Budget 2015
C.D. Howe Shadow Budget 2015
C.D. Howe Shadow Budget 2015
C.D. HOWE
I n sti tute
commentary
NO. 423
Challenges, Growth
and Opportunity:
A Shadow Federal
Budget for 2015
Staying in the black is the first order of business for Ottawa in this Shadow Budget,
which also sets out actions to promote economic growth and individual prosperity.
. HOWE
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isbn 978-0-88806-945-0
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Finn Poschmann
Vice-President, Policy Analysis
C.D. Howe Institute Commentary is a periodic analysis of, and commentary on, current public policy issues. Barry Norris and
James Fleming edited the manuscript; Yang Zhao prepared it for publication. As with all Institute publications, the views
expressed here are those of the authors and do not necessarily reflect the opinions of the Institutes members or Board of
Directors. Quotation with appropriate credit is permissible.
To order this publication please contact: the C.D. Howe Institute, 67 Yonge St., Suite 300, Toronto, Ontario M5E 1J8. The
full text of this publication is also available on the Institutes website at www.cdhowe.org.
The authors thank Ben Dachis and Colin Busby for their views and contributions, as well as members of C.D. Howe
Insttutes Fiscal and Tax Competitiveness Council for their comments and suggestions on previous drafts. They include
Don Drummond, Gabriel J. Hayos, Angelo Nikolakakis, Noeline Simon, Brent Mizzen, Albert Baker and Nick Pantaleo.
Prudent Projections
As in past years, the Shadow Budget uses as its
baseline the economic and fiscal projections from
the Department of Finances most recent Update
of Economic and Fiscal Projections (Canada 2014),
published last November. The projections are
based on inputs from private sector forecasters,
with adjustments to reflect changes in economic
conditions and to provide a cushion to protect the
bottom line from unpleasant surprises.
The fall in world crude oil prices since the third
quarter of 2014 prompted such an adjustment in
the November Update. The Update anticipated that
crude oil prices would be about one-sixth lower
than those prevailing when the survey of private
sector economists was completed in September
2014, and that federal revenues would be reduced
by $2.5 billion per year over the forecast horizon,
starting in 2015. Since the Update, however,
crude oil prices have fallen further. At the time of
writing, West Texas Intermediate (WTI) oil was
slightly above $50 per barrel on the New York
Mercantile Exchange, some two-fifths below the
Updates projections. Over time, less expensive
energy will have important positive effects on the
Canadian economy, including higher disposable
incomes and spending on consumer goods, lower
production costs and more robust growth abroad,
with concomitant higher demand for Canadas nonenergy exports. In the near term, however, lower
oil prices will have a negative effect on economic
activity, depressing output in the energy sector and
hurting Canadas terms of trade.
Commentary 423
1 The recent divestiture of the federal governments remaining shares in General Motors will earn net proceeds of about
$0.5 billion calculated against its last valuation as of March 31st, 2014, and about $1.2 billion against its valuation as of
March 28th, 2013. Those are rough estimates since the actual value of the deal has not yet been released at the time of
writing. Since the projections in the November 2014 Update already include a $1.2 billion provision for net proceeds from
future asset sales (the provision is calculated from 2013 base values since it was announced and budgeted first in the 2013
November Update), the net proceeds from the sale roughly offset the value of the provision. Therefore, no change to our
baseline projections appears to be required as a result of the recently announced divestiture.
2015/16
2016/17
2.4
2.6
2.4
GDP inflation
1.9
1.6
2.0
4.4
4.3
4.4
252.3
267.2
279.2
11.7
12.1
12.8
Investment incomec
16.6
18.2
18.6
280.6
297.5
310.6
114.1
115.7
118.5
138.7
148.2
154.4
27.7
28.7
30.4
Total expenditures
280.5
292.6
303.3
6.0
6.0
6.0
264.0
279.3
292.0
252.8
263.9
272.9
11.1
10.5
11.8
6.0
6.0
6.0
5.9
1.1
1.3
Federal Revenues
Taxes on incomes, payroll, consumption and other transactions
Total revenues
Federal Expenditures
Fiscal Prudence
Provision for prudence
Notes:
(a) Based on November Update (Canada 2014).
(b) Estimated figures, includes earnings of consolidated Crown corporations; excludes the provision for fiscal prudence.
(c) Estimated figures, including interest income, net income from enterprise Crown corporations, foreign exchange revenues
and other returns on investment.
Sources: Canada (2014); authors calculations.
Commentary 423
Figure 1: Ottawas Program Expenses on Personnel and Other Operations, Fiscal Year 2003/04 to
2013/14
50
45
40
$ billions
35
30
25
20
15
10
4
/1
13
20
12
/1
20
20
11
/1
1
/1
10
20
/1
20
/0
08
20
Personnel Expenses
09
8
/0
07
20
20
06
/0
6
/0
05
20
/0
04
20
20
03
/0
2 Although some observers note that the wage premium for federal employees is larger at lower and mid-level positions, and
warn that narrowing the premium overall would hurt Ottawas ability to retain talent at higher levels, we note that the federal
governments pension plan which, as we explore in the following paragraphs, is more generous than commonly understood
is a final-salary scheme that compensates senior positions very generously. The federal government does not have a serious
retention problem for its senior employees until they reach the age at which they are eligible for their pensions at which
point they usually do leave. A more sensible compensation structure would neither incent people so overwhelmingly to stay
until they become eligible for their pensions, nor incent them so strongly to leave after they become eligible.
3 Estimate from data provided in the Expenditure Review of Federal Public Sector Compensation Policy and Comparability,
2006.
Commentary 423
Figure 2: Average Total Employee Compensation per Hour of Work, Various Sectors, 1997 and 2013
70
60
50
40
30
20
10
0
Construction
Manufacturing
Finance and
Professional,
insurance
scientific and
technical services
1997
Provincial and
territorial
government
services
Federal
government
services (excluding
defence)
2013
Commentary 423
4 Based on the RRB rate of 0.91 percent as of the end of 2013/14. More details on the methods used can be found in Robson
and Laurin (2014a) and prior annual updates in this series.
5 Authors calculations performed using Statistics Canadas Social Policy Simulation and Database Model, v. 21.0.
10
Table 2: Reported and Restated Federal Consolidated Statement of Financial Position, Fiscal Year
2013/14
Reported
Restated
$ billions
Liabilities
Bonds, treasury bills and other interest-bearing debt instruments
665
153
71
71
111
111
1,001
1,092
72
72
118
118
31
31
97
97
318
318
Net debt
682
773
62
62
70
70
Accumulated deficit
612
703
Total liabilities
665
+91
244
Financial assets
Non-financial assets
Memo item
Present value of tax deferrals in registered accounts
Net Position including deferred taxes
0
612
+566
566
137
11
Commentary 423
6 We recommend publishing these figures as a supplement to the formal financial statements, rather than as part of them,
because they are contingent changes in tax rates, for example, would change their value.
12
13
Commentary 423
7 The allowance is calculated by multiplying shareholders equity by an appropriate nominal interest rate. The rate must be low
enough to ensure corporations pay taxes in full on their economic profits.
14
15
Commentary 423
Building Infrastructure
16
Crown Lenders
17
Commentary 423
18
19
Commentary 423
20
21
Commentary 423
Table 3: Fiscal Projections with Shadow Budget Initiatives, Fiscal Years 2014/15 to 2016/17
2014/15
2015/16
2016/17
($ billion)
Baseline projections (Table 1)
Projected revenues
280.6
297.5
310.6
280.5
292.6
303.3
6.0
6.0
6.0
5.9
1.1
1.3
0.9
0.7
2.8
1.1
1.0
0.4
0.1
0.1
0.1
0.1
0.1
0.3
0.3
0.1
0.1
0.1
0.1
0.4
0.3
0.1
0.1
Increase the age at which contributions to tax-deferred retirement saving vehicles must
stop
0.1
0.1
0.1
2.4
1.0
5.9
1.3
0.3
618.8
617.5
617.2
31.3
30.2
28.9
Projected expenditures
Eliminate the federal excise tax on aviation gasoline and jet fuel
Introduce a more efficient payments system
Build infrastructure
Expand eligibility to the Pension Income Tax Credit and pension income splitting
Total
22
R efer ences
Advisory Panel on Canadas System of International
Taxation. 2008. Final Report. Ottawa: Department
of Finance.
23
Commentary 423
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