Goodale's Something-for-Everyone 2005 Budget

The Government gives them space inside the Parliament Buildings every budget day - the cut-our-taxes gripers, the spend-our-way pleaders, the doom-and-gloom second-guessers. But last week, after Finance Minister Ralph Goodale tabled this year's fiscal blueprint, it was tough to find anyone peddling a convincing rant among the lobbyists and special interest groups camped out in the annual budget-reaction bazaar. Business hadn't banked on corporate tax cuts and got them anyway. Municipalities had asked for a lot and received even more. Billions for defence (partly placating the right), and for daycare and the environment (muting complaints from the left) flowed as expected. The worst many critics could find to say was that the Liberals, in striving to please so many and preserve their minority, failed to offer a clear strategic focus.

With everybody busy counting up the cash, though, a single ominous note in this most upbeat of budgets largely escaped notice. Amid the sunny spending promises and surplus projections, Goodale slipped in a bit of anxiety: America is not what it once was. Washington is racking up huge deficits, in sharp contrast to Ottawa's better-than-balanced books, and there's an equally troubling record U.S. current account deficit, a measure that includes both trade and investment. How much do the American elephant's ailing economic fundamentals threaten the fiscally healthier Canadian mouse? "The American situation," Goodale warned in his otherwise celebratory speech, "could lead to higher interest rates, slower U.S. growth and a further depreciation in the American dollar - any of which could negatively affect us here in Canada."

In other words, forget the days when Canadians might count on being pulled along by a turbocharged U.S. ECONOMY. Instead, the worry is of being dragged down when it sputters. After all, America buys 80 per cent of Canada's exports. Goodale said the government can't afford to be "paralyzed" by fear of what might happen if the American engine stalls, but must "plan accordingly and continue to keep ourselves in a position of fiscal strength, the better to handle the risks, should they arise." That the issue is clearly U.S. weaknesses, not Canadian shortcomings, is worth reflecting on. What a change from the 1980s and early '90s, when every new federal budget tabled in Ottawa prompted a spate of commentaries about how much sounder Washington's economic management looked than Ottawa's bumbling.

Too bad Goodale couldn't just note the contrast and invite Canadians to feel good about it. The situation is far too precarious to indulge in that sort of schadenfreude. As Jack Mintz, president of the C.D. Howe Institute, sees it, two very different economic scenarios for 2005 form the real backdrop for the federal budget. The rosier outlook holds that the U.S. dollar has already bottomed out, and a robust American economy will, along with strong Asian growth, power the world economy - and Canadian exports - to a good year. The bleaker prospect is that foreign investors will be frightened off by those twin American deficits, causing the U.S. dollar to plunge further, severely cutting into America's ability to keep buying products from countries, like Canada, whose exports would suddenly be priced in more costly currencies. "Economists," Mintz adds glumly, "tend to put a lot of weight on the second scenario."

While Goodale acknowledged the dangers posed by the precarious U.S. situation, his working assumption is that this year and next will be good times. He cited the average private sector forecasts of 2.9 per cent gross domestic product growth in 2005 and 3.1 per cent in 2006 - not bad at all. But Mintz notes that Goodale's budget also assumes that federal revenues will rise by only around two per cent in 2005-06. And that projection is far too low, he says - unless what lurks behind it is the worry that the U.S. market for Canadian goods and services might sour, hitting our economy and, in turn, shrinking Ottawa's tax haul.

Exporting companies have already weathered a 25 per cent appreciation of the Canadian dollar relative to the U.S. dollar since the end of 2002. They are apprehensive about the prospect of more of the same.

Yet Mike Snow, president of Stack A Shelf, a Cambridge, Ont., company that employs about 600 people to manufacture particle-board shelves and storage products, says banking on a long-term currency advantage is bad business strategy. "We've got to be globally competitive whether the Canadian dollar is at US65 cents or US85 cents," Snow says. "You don't want your currency to be your strategy driver, but you can't ignore it. It's challenging, though."

The federal government can't pretend to insulate Canadian firms and their workers from potential U.S. economic woes. But what Ottawa can do is exploit its surpluses to steadily build a lasting edge. One key area is planning for the strain of an aging population as baby boomers start retiring in droves. While George W. Bush is trying to sell his controversial partial privatization of the unsteady U.S. Social Security program, Ottawa and the provinces went a long way toward shoring up Canada's retirement system in 1996 when they put the Canada Pension Plan on a solid financial footing. Last week's budget boosted other portions of the system, increasing the Guaranteed Income Supplement for low-income seniors and, at the other end of the income spectrum, increasing the RRSP contribution limits, a move that will mostly benefit well-off Canadians saving for retirement.

Other key budget measures can also be viewed through the lens of the Canada-U.S. relationship, economic and otherwise. In a week when Prime Minister Paul Martin rejected Bush's bid for Canada to participate in his missile shield program, the budget's $12.8 billion in new defence spending over five years was packaged as the answer to any claim that Canada would shirk its responsibilities as a military ally. And after years of Canadian mayors complaining that U.S. cities have much more money to spend, the $5 billion Ottawa allocated over five years for its "new deal" for communities aimed to level the municipal playing field. A passel of spending pledges for training and technology is designed to reduce the U.S. productivity advantage that troubles many economists.

Of course, this way of looking at the budget assumes that the key comparisons - often the only ones that seem to really matter - are with the United States. But that may be changing. Bank of Nova Scotia senior economist Adrienne Warren said in a recent report that internal North American integration is waning in importance. In what she calls a "major shift," exports among Canada, the U.S. and Mexico grew more slowly than their trade with the rest of the world in 2003 and 2004 - reversing the powerful trend of the previous 10 years. "For Canada and the United States," Warren observed, "the degree of trade interdependence has been declining since the beginning of the decade, and has now fallen below pre-NAFTA levels." It's no surprise that China and the other Asian economies are growing in importance to Canada and the U.S., particularly as sources of low-cost manufacturing inputs.

Coping with the dire economic risks posed by the U.S. might look tricky now. But the challenges of a more globalized future, with new unknowns and untested relationships, might soon make today's narrower bilateral worries appear quaint.

WAITING FOR REGULATIONS

There was money for Kyoto, but where are the rules?

ENVIRONMENT MINISTER Stéphane Dion has promised to deliver a full plan sometime in the next few weeks on how Canada will achieve its tough Kyoto treaty reductions in greenhouse gas emissions. The budget announced more than $3 billion in new green funding over five years, including a $225-million expansion of incentives for making houses more energy efficient and a $1-billion fund for environmental projects. But will there be rules and regulations to go with these incentives? The budget alludes to ongoing negotiations with auto manufacturers aimed at cutting greenhouse gas emissions from vehicles sold in Canada by 25 per cent by 2010. On autos and other industries, will Dion deliver?

QUIET ON HEALTH - FOR NOW

This could still be the sleeper issue in Ottawa's finances

IF THERE'S ONE area where Paul Martin feels he's done his job, it's on health care. In his deal with the premiers last fall, he promised to pump $41.3 billion in new funding into health over 10 years, $18.1 billion of that from 2004-05 to 2009-10. The budget made good on that commitment. It's far too soon for any unseemly resumption of provincial pleas for more. Yet there's no guarantee those demands won't come. Early this year, Michael Decter, chairman of the Health Council of Canada, called for another national health summit, this time to focus on shortages of health-care providers. "Without enough professionals," he said, "all other renewal efforts will founder." Does that mean the health file isn't closed for now? Could it be the sleeper issue in federal finances?

NO MONEY, BUT NO AGREEMENT

Ken Dryden is still looking for a provincial daycare deal

Social Development Minister Ken Dryden was not able to deliver an agreement with the provinces on a national child-care and early learning plan in time for the budget. Some provinces, notably Alberta and Quebec, wouldn't agree to Dryden's demands on how $5 billion over five years should be spent. The federal Liberals have promised to pour the money mainly into high-quality daycare. In the absence of an agreement, the budget created a $700-million fund for the provinces to draw on by the end of 2005-06 with no strings attached - "while a framework for quality programs and services across the country is developed." But having started the money flowing without settling on terms, will Dryden ever get that elusive deal?

See also BUDGETARY PROCESS.

Maclean's March 7, 2005