I'm about to leave for Ottawa to take part in this conference (program here). My original plan was to arrive early and spend the day touring Ottawa, but then the government decided that March 29 would also be budget day.
So I'll be spending the day instead at the budget lockup with the Globe and Mail team. I'll be taking notes and I'll post them when I'm able.
In the meantime, let this be the post where people discuss the budget in the comments.
Update: I'm free!
10:00 I'm in
10:01 OH MY GOD THEY'RE ELIMINATING THE PENNY. The day can only go downhill from here.
10:05: Gradual increase in OAS retirement age, starting in 2023. I will be able to receive OAS when I am 66 years and 10 months.
10:10: “Streamlining” regulatory reviews of resource projects. Goal of "one project, on review"
10:15: "Creating value-added jobs through innovation" What does that even mean?
10:20: Adopting Jenkins Report recommendation to shift from tax credits to direct support. $400m made available for venture capital. Details on how it will be distributed to come in future months. SR&ED being scaled back. Notes that reduction in CIT made SR&ED more generous. Also, study of contingency fees. Much – sometimes up to 30% – of SR&ED benefits goes to these consultants
10:45: Limiting EI premium increases by 5 cents/year until EI Operating Account balanced. Hiring credit for small business
10:50: “Removing disincentives to work” Current pilot project has 100% clawback; new pilot project will set at 50%
11:10: Happily, someone had a shiny new penny so that they could take a picture of it on one of the budget documents.
11:15: Sigh. GST/HST exemptions for a bunch of health-related goods and services. Okay, it’s not much in terms of foregone revenues ($3m), but still. This is a bad habit that governments have to break.
11:20: Another OAS change: voluntary deferral for higher payments later. Actuarially neutral, as is case for CPP. It will be interesting to see that take-up on this. It’s not a cost-saving measure, but possible labour supply effect.
11:35: Not seeing anything for low-income people who are just under retirement age. These people are for the most part hanging on until the comparative financial security of the OAS/GIS. Presumably the provinces will have something to say about the increased demand on their social security nets.
11:40: There’s the headline number for cuts savings: $5.2/year. Apparently that’s 6.9% of an ‘aggregate review base’ of $75.3b. $1.5b in 2012-13, $3.1b in 2013-14, $5.1b in 2014-14. So the $5.2b number is a cruising speed at the end of the 3-year horizon.
11:50: Huh. Katimavik is being canceled. Didn’t know it still existed.
12:00: Total tax revenues for 2012-12 projected in 2011 budget: $202.7b. Total tax revenues for 2011-12 in 2012 budget: $202.7b.
1:50: Why is the age for GIS increased? There’s an actuarial argument for doing something about the OAS, but the role of the Guaranteed Income Supplement is to Supplement Incomes. What’s the actuarial argument here?
2:15: Handed in my post, on productivity and trade. I’m not too thrilled at the idea of governments getting in the venture capital business, but since nothing else seems to be working, I suppose that it’s worth a shot. The stuff about expanded trade may turn out to be the most effective productivity measure.
3:50: Am working on next post. It turns out to be really easy to predict spending projections in a Conservative budget.
Worthwhile Canadian Initiative 
Well, happy budget day. Why don’t I start off with my best guess for the final tally on the 2011-12 deficit. I think it will come in at 22 billion.
Is this like the “Price is Right”? Whoever’s closest without going over? I shudder to think what price we win in this contest.
$22B is probably about right. They were at $17B and change in December, but with sharply narrowing deficits on a monthly basis. Over the last couple of years they’ve basically had balanced budgets in Jan and Feb and a hefty deficit in March. God knows what year end accounting they might toss in, but I’ll go with $21B.
IIRC, $20B is approximately the nominal deficit that leaves the debt/GDP ratio constant.
Well, we have some leaks. Some across-the-board cuts in ministries, and raising OAS eligibility to 67. I don’t understand the latter. I would have opted to save an equivalent amount by reducing the threshold for OAS clawbacks. Currently, 98% of retirees receive OAS, including many very comfortable recipients.
“I would have opted to save an equivalent amount by reducing the threshold for OAS clawbacks.”
At least one reason for not doing that is that, perversely, doing so would increase the marginal tax rate on saving for retirement.
But fundamentally, I think what’s going on is that the Tories are trying to change the OAS system to encourage people to work longer in light of changing life expectancies and work patterns (i.e., people spending a whack of years in school before they start working). Monkeying around with the clawback doesn’t do that, but changing the retirement age or changing the time at which you can collect “full” OAS (as we’ve done with the CPP) does. And I suspect that the Tories think that, politically, that is more viable (particularly when the change doesn’t take effect of 10 years) than telling some people (whether they need it or not) that they won’t get OAS at all. They’re probably right.
The problem I have with the mantra that we can or should push back the retirement age because we’re living longer is that while on average that might be true, for most people their reality is different from average. If we relied on averages for public policy, we wouldn’t need the GIS, we wouldn’t need welfare systems, and so on and so forth.
The problem I have with the mantra that we can or should push back the retirement age because we’re living longer is that while on average that might be true, for most people their reality is different from average. If we relied on averages for public policy, we wouldn’t need the GIS, we wouldn’t need welfare systems, and so on and so forth.
Well, yeah, for about 99.9% of people the reality is different than the average (and the reality with age is that most people live longer than the average, while a small minority live significantly less than the average – i.e., your 20-year old who dies in drug deal gone bad), but that really isn’t a response to the argument about pushing back the retirement age. More the point, that was true when OAS was first introduced as well, but no one suggested that 65 was unfair because some poeple didn’t live that long or died shortly thereafter.
That may be an argument for supplementing the OAS with something similar to the CPP disability scheme we have now (which allows people to retire early if they can no longer work), i.e., a smart policy that targets real need.
Jim,
Just to follow-up on that point, it probably isn’t just “on average” that people are living longer (which suggests that some people may be living longer lives, some may be living shorter lives) – I’d suggest to you that almost everybody alive today will live longer than they would have, say, 40 years ago. And that that longer-life expectancy is true accross the income spectrum, for disadvantaged groups (for example, aboriginals). It isn’t just the “average” that’s increased, the entire distribution of life expectancy has shifted up.
I am amazed that any number later than 65 as a benefit-eligibility age (not a “retirement age”) horrifies some people. This is a policy relic from the 19th century that we have clung to with very negative consequences. If you advocated African colonialism, a men-only voting franchise, or War against the Hun, you’d be thought crazy. But that’s the context of the 65 marker.
Livio,
I wouldn’t put too much weight on their $24.9 billion dollar estimate for the 2011-12 budget deficit. I was just looking at thee Fiscal monitor up to the end of January, and for the first 10 months of the year they were running a $16 billion deficit. I’d be very surprised if their final numbers were much higher than your 22 billion estimate.
“Why is the age for GIS increased? There’s an actuarial argument for doing something about the OAS, but the role of the Guaranteed Income Supplement is to Supplement Incomes. What’s the actuarial argument here?”
You kind of have to, don’t you? The income being supplemented by the GIS is the OAS, you can’t get the former unless you qualify for the latter. Moreover, from a policy perspective, the role of the GIS isn’t to provide a supplement to poor people (most poor people can’t collect it), it’s to provide a supplement to poor RETIRED people.
This is what I wrote a few months ago: “For an increase in the entitlement age to achieve substantial cost savings, it will have to be in place when those 1959 babies hit 65 in 2024.
So I’m predicting that the entitlement age will gradually be increased, in 6 month increments, with a new entitlement age of 67 in place by 2023.”
Not exactly spot on the money, it’s starting not ending in 2023.
The Tories are afraid of alienating aging Baby Boomers with a pocket-book issue.
But fundamentally, I think what’s going on is that the Tories are trying to change the OAS system to encourage people to work longer in light of changing life expectancies and work patterns (i.e., people spending a whack of years in school and then spend a whack of years unemployed before they start working, and even if they are employed, they may be significantly underemployed and/or have precarious, non-standard employment with negligible opportunity to save for retirement).
Your post needed some fixes, Bob.
Bob,
I believe there’s been some work which suggests that there is in fact a significant difference in the degree to which life expectancy has increased across income levels. Something linked to CPP or the GIS might be adequate to cover those falling through this gap, but I don’t like the cavalier assumption that everyone is both living longer and has work they can continue to do for several more years.
Determinant – Like.
Paul Krugman has posted data multiple times in the past year on increases in life expectancy across income levels. Life expectancies for people who make less money have indeed increased relatively little. Can’t recall further details off the top of my head, but that was the take-home message.
Jim: I believe there’s been some work which suggests that there is in fact a significant difference in the degree to which life expectancy has increased across income levels. Something linked to CPP or the GIS might be adequate to cover those falling through this gap, but I don’t like the cavalier assumption that everyone is both living longer and has work they can continue to do for several more years.
Are you suggesting that life-expectancies have fallen for the poor in OAS was introduced? What’s relevant isn’t the gap between rich and poor, but the the evolution of the life-expectancy of the poor over the last 40 years. I can’t speak for Paul Krugman’s data that Jeremy mentions, but I have seen Canadian data to the effect that life-expectancies for certain disavantaged groups have increased significantly over that time frame. Between 1980 and 2001, for example, the life expectancy at birth of “registered indians” increase from 61/68 for men/woman to 70/76 – hard to think of many groups of Canadians more disadvantaged than natives.
And according to Statscan, while there are significant gaps in life expectancy by income, the poorest decile of Canadian men/woman at age 25 can expect to live well into their 70’s/80’s. By way of comparison, those are longer than the similar life expectancy for the AVERAGE Canadian 40 years ago.
Sorry Jim, while no one disputes that poor Canadians have a harder life than the average Canadian, they are clearly living longer and healthier lives than they were 40 years ago.
AS one of my Tory friends pointed out, when the opening line of the Toronto Star’s lead story about a budget raising OAS eligibily and reducing the federal civil service by 19,000 jobs is talking about the abolishment of the penny, it’s a political success.
Bob, like I said in my ELab post, it’s all about salience. The penny is salient to people, some change that’ll take place in 10 years time, or 19,000 job cuts isn’t.
“And according to Statscan, while there are significant gaps in life expectancy by income, the poorest decile of Canadian men/woman at age 25 can expect to live well into their 70’s/80’s.”
Have to be a bit careful with that because some of those poor will be healthy immigrants.
You think that 19,000 are really going to disappear? The last time the government implemented cuts under the Chretien government, the number of contractors, the “the shadow Public Service” multiplied.
The “back office” target of this initiative will fall directly on those contractors, actual permanent Core Public Servants will escape direct cuts, especially those involved in direct program delivery.
Sorry about the 600 Executives though. I’m sure they’ll find a deployment.
What will make or break this Budget for me is if the Public Service intends to continue hiring at the entry level, as many senior managers have stated. They learned from the Chretien Cuts that you have to continue hiring at the bottom in order to maintain a health demographic profile in the Public Service. You can’t just stop hiring, then you don’t have a decade’s worth of worker cohorts. The Public Service has this very problem.
Austerity drives like this win or lose if the private sector offers work by way of substitution. By my experience, this is false, they don’t. Canada does not, repeat does not, have a crowding-out effect. The private sector’s record of job creation lately had been execrable.
We are not labour-supply limited in Canada right now. Even Ben Bernanke says that he does not believe private-sector cries about skills shortages.
Bob – just because the poor are better off than they were 40 years ago I’m not convinced excuses a change which will hit them much harder than the rich. Nor do I think they’re living such outrageously longer lives that we can’t afford to give them assistance.
FWIW, a quick search of Krugman’s blog reveals some US data…
Life expectancy at age 65 for male workers has risen by about 1 year since 1977 for workers in the bottom half of the earning distribution, while it’s risen by about 7 years for workers in the top half (http://krugman.blogs.nytimes.com/2011/08/24/the-strange-power-of-really-bad-ideas-medicare-edition/). Divergence of this sort has been going on for at least a century (http://krugman.blogs.nytimes.com/2011/04/26/raising-the-medicare-age/). And while life expectancy at age 65 is what you ought to be looking at (http://krugman.blogs.nytimes.com/2010/08/13/fun-with-mortality-tables/, http://krugman.blogs.nytimes.com/2010/08/14/more-on-mortality/), life expectancies at birth rather than at age 65 also are diverging (http://krugman.blogs.nytimes.com/2010/08/13/live-long-and-prosper-2/). In the US, increases in the age of Social Security eligibility have been roughly keeping pace with increases in life expectancy for low-earning workers, but have been outpaced by increases in life expectancy for high-earning workers (http://krugman.blogs.nytimes.com/2010/08/13/live-long-and-prosper-2/).
Some Stats Can data I’ve seen also suggests that the health disparity is as great if not greater.
I don’t have it at my fingertips, but Canada’s Russel Wilkins has documented statistical evidence linking health outcomes with income and wealth.
In the U.K., Richard Wilkinson has co-authored The Spirit Level and other works that deal with this and other impacts.
On health/wealth:
Big endogeneity issue – does being sick make you poor or does being poor make you sick? Both are at play.
For some Canadian evidence that social policy can make a difference to health outcomes, see Evelyn Forget’s article in Canadian Public Policy on the health impacts of a guaranteed annual income and also Herb Emery’s work, which I think has just come out in CJE, on the health impacts of pension introduction.
I wonder if any of you could comment on the changes to the SR&ED tax credit changes. I work for a large multinational pharmaceutical, and the corporation receives tax credits for the development projects I work on with new vaccines.
Is there any analysis of what the end result will be? I really doubt that Ottawa can pick new innovative ideas with grants more effectively than market-driven research that is funded by tax credits.
I’m wondering specifically what kind of behavioural response we should expect from these changes.
Also, though I don’t know this, I expect that productivity gains would be larger from R&D then they would be from investments in resource extraction. Have the tax credits to the mining and energy sector changed at all?
I’d love to hear from those in econometrics what they think of these changes.
“Bob – just because the poor are better off than they were 40 years ago I’m not convinced excuses a change which will hit them much harder than the rich. Nor do I think they’re living such outrageously longer lives that we can’t afford to give them assistance.”
No one’s saying that we shouldn’t help the poor. I’m saying we shouldn’t help the semi-elderly just because they turn 65, without regard to whether or not they can work. Put it this way, does it make any sense for the government to provide assistant to the poor who can’t work just because they turn 65 (but not when they’re 64, or 41 or 17)? Or to provid assistance to the middle-class who can work ratner than the poor who can’t who are 64, 41 or 17? Hard to justify that on any principled basis. If the argument is that we should provide assistance to people who are poor and can’t work, great, but what does that have to do with OAS? Frankly, if that’s what you want to do, that’s a pretty compelling reason for reforming OAS to free up money to be able to help those who actually need it.
It’s hard justify (on any principled basis) maintaining a program that, for the most part, benefits people who are not particularly poor and who, for the most part, can still work (unlike 40 years ag0), on the grounds that it helps the relatively small minority who are or can’t.
Lab rat,
I share your skepticism about the Government’s ability to pick winners and losers, but the SR&ED tax credist system has been a mess. Not only has it not worked, but I gather that it’s spawned a small industry of consultants whose sole activity is to characterize otherwise ordinary-course business activities as SR&ED (and who keep a good chunk of an tax credit as fees). It’s less a subsidy for R&D as a subsidy for rent-seeking by tax consultants. I suspect the thinking is that reducing the tax credit will reduce the incentive for people to spend money “generating” SR&ED claims that aren’t there, while stil rewarding people who engage in genuine R&D.
In terms of the mining and energy sector, they announced that they’re phasing out a 10% tax credit for certain pre-production expenses over 3 years. They’re also phasing out the Atlantic Investment Tax Credit for oil, gas and mining activities over the next four years. It’s actually quite balanced in that respect. This is part of their G-20 commitment to phase out subsidies for fossil fuel production. They are extending the “temporary” super-flow-through share rules for junior mining companies (which “temporary” rules were first introduced in 2000 and have been extended on a year-by-year basis since 2006).
One item I was glad to see eliminated was the previous commitment to annual 6% increases in healthcare transfers to the provinces, a plan that always struck me as hair-raisingly insane. Interesting that there has been little comment on it.
@Bob and Jim: I am very leery of terms like “health disparity”; it suggests that individual health is somehow distributed by a market or a central planner, when in fact it arises out of a number of factors (almost none of which involve actual healthcare). Indeed there is a strong argument to be made that one’s lifetime health course is, for most people, predictable by the time a person is in their 30s.
@Barnaby; there is no question that income and human capital factors are linked to health. The policy question (cf. Frances on endogeneity) is what determines the health outcomes of the lower rungs. I am puzzled by the alleged link to inequality per se. If all our incomes fell/rose to $25,000 per year, would there be a great increase in health? No.
Bob Smith,
Fair enough about consultants; we have one visiting us in a few weeks. He comes in for a refresher every year, as we have been increasing head count greatly since I started here two years ago. But a lot of the changes don’t seem to be aimed at consultants. Capital investments for example are a good example of what I’m concerned about. If you’re a scientist thinking of striking it out on your own, you’re going to need capital to get your idea off the ground and into the project pipeline. Capital is now out of the equation, and looking for grants from administrators/investors that may not understand the need for your innovative idea introduces a lot of uncertainty in the bottom line for those early years of your start-up.
I don’t know from an industry stand-point that the changes are going to improve R&D in Canada at all, in fact my gut tells me the opposite. I think this makes it far more difficult for small start-up biotech companies to get off the ground.
My sense is that the Tories are experimenting with other ways of promoting R&D – whether they work any better or not, who know, but they’d be hard pressed to be less successful.
In terms of the changes to capital investments, I suspect part of the problem there is that the characterization of capital assets as being for SR&ED was vulnerable to abuse – capital assets being inherently long lived assets capable of being used for different purposes. That’s not an area of tax law where I spend a lot of time, but I could see some of those consultants playing real games with that.
Again though, if the problem is abuse, then deal with the abuse. Getting rid of it all together certainly won’t help develop R&D in sectors like biotech where capital assets are often solely used on R&D. I wonder if the Canadian Biotechnology Advisory Committee was even consulted about the proposed changes, and how to better deal with things like abuse of the SR&ED program.
No need to throw out the baby with the bath water.
“Again though, if the problem is abuse, then deal with the abuse.”
Yeah, but easier said than done – frankly, Finance makes a hash out of anti-avoidance rules, and they usually create more problems than they resolve. As it is, the compliance cost associated with SR&ED claims is enormous (both for taxpayers and for the CRA which audits all SR&ED claims). In some sense you have the same problem whether it’s a bureaucrat handing out cash or a CRA auditor assessing a SR&ED claim, they’re inherently going to know less about the merits of the claim that the person doing the R&D.
Best lines:
“10:15: “Creating value-added jobs through innovation” What does that even mean?”
“11:50: Huh. Katimavik is being canceled. Didn’t know it still existed.”
As a certified lefty card-carrying NDP member who believes the Liberal Party is a vacuous, confused entity that can never be the vehicle for what I want (pharmacare), I have to say in all honesty that Katimavik would be better off as a private foundation. It really has no business being government-funded and I sat in on a recruitment session for it in high school.
“”10:15: “Creating value-added jobs through innovation” What does that even mean?”
Translation: We’re going to find some sector, stoke it into a bubble, claim all the jobs created as ours and then when it bursts and everyone gets laid off, claim it was the private sector and the government has no business picking winners and losers. Same line that every government pedals.
So, growing the pie of available venture capital in Canada may not be the worst idea. One theme we hear repeatedly is that companies that reach a certain size have to leave the country (or be acquired) in order to get the capital to continue growing. There are a multitude of ways it could be done badly, but I think it is not obviously going to be a failure, compared to the programs it replaces. We have paid more for car plants not to be shut down.
@Andrew F : the telecom venture in which I was involved in the 90’s was bought out by a big European concern with all the usual promises. Some of the partners were “promoted” to “management position” in Europe.After less than 2 years, they had all been cashierd. The canadian palnt and research lab were closed and the scientific staff let go. All they were after after was the patents.
65 to 67: Last week-end, Postmedia News was reporting that companies under federal legislation were mass unloading their 60-65 staff in anticipation of the anti-age-discrimination coming in force. The truth is, after 45, you’re surplus to requirements. They don’t even try to work the proles to death, which is the Harper-Flaherty agenda.