Month: March 2009

A selection of links and commentary by experts reacting to Ontario's 2009-2010 Budget.

Go straight to: Conference Board of Canada | Royal Bank | BMO Nesbitt Burns | TD Bank | CIBC World Markets | Scotia Economics

The Conference Board of Canada

The coming year will prove to be a year of “firsts” for Ontario, the traditional engine of growth in the Canadian economy. For the first time since the inception of provincial trade records in 1981, Ontario will record a net trade deficit. This unfortunate development will trickle into the medium-term outlook for the province even as U.S. consumer sentiment revives. Ontario is also poised to go from “have” to “have not” status for the first time, and it will receive $347 million in federal equalization payments. Budget 2009 revealed the final “first” in the trifecta of the province’s woes: Ontario will run the largest provincial deficit in history—$14.1 billion—for the coming fiscal year! With an ambitious near-term spending plan and soft own-source revenue growth as a result of the global downturn, the province will not return to fiscal balance until 2015.

Despite this bad news, Ontario’s most recent budget does provide a silver lining to an otherwise dismal outlook in the form of timely stimulus. Many of the measures introduced in Budget 2009 are consistent with the Conference Board’s view on how to mitigate the effects of the current recession

The decision to convert Ontario’s retail sales tax to a harmonized value-added structure  in partnership with the federal government by July 1, 2010 is arguably the centrepiece of Budget 2009. In the long run, harmonization with the federal base will generate myriad economic efficiency benefits for businesses and consumers

Royal Bank [PDF]

The move to a harmonized rate should be applauded in terms of removing the inefficiencies of the current PST that applies to business inputs which raises production costs. One earlier reservation by the provincial government about the move to harmonization was that the GST had a much broader tax base that included items the McGuinty government preferred to have kept exempt. (On this front, the provincial government won some concessions retaining exemptions for such areas as children’s clothing and footware.) This wider tax base did provide the benefit of bringing in additional tax revenue to the province to the tune of $3.8B over fiscal 2010-11 and 2011-12

… Though [corporate and personal income] tax cuts are welcome and should help boost growth and productivity over the medium term, the delay until 2010 does little to counter the current economic weakness. A 2010 implementation is largely a reflection of the means to fund these cuts not starting to flow until then. Given the severity of the downturn, the argument could be made to accelerate the cuts and take the temporary hit to the deficit that would be reversed in 2010. However, currently proposed these tax changes have negligible net impact on the overall budget balance ($400 million) over fiscal 2009-10 and fiscal 2010-11.

BMO Nesbitt Burns [PDF] Robert Kavcic:

The Province of Ontario served up an aggressive budget against the worst economic backdrop since at least the early-90s, providing a mix of tax relief for individuals and businesses, infrastructure investment and still-strong growth in program spending. Overall, this budget addresses the near-term need for economic stimulus, while taking some steps to improve the province’s medium-term competitive position….

Ontario’s challenges, however, are not just cyclical as it has been shedding manufacturing jobs for about six years. Indeed, postrecession policy will still be challenged by the need to make Ontario an attractive and costeffective place to do business—this budget is a start.

TD Bank [PDF] Derek Burleton and Pascal Gauthier:

it has presented a broad
plan to eliminate the deficit over the next seven years.
But as importantly, today’s budget includes a series of bold
changes to bolster the province’s competitiveness beginning
in mid-2010, with sales tax harmonization and reductions in corporate income tax rates forming the package’s
centerpieces. The latter move was today’s most notable
surprise…

Whereas business inputs such as machinery and
equipment are taxed under the retail sales tax (RST), firms
will now get a tax credit as they do with the federal GST.
As such, business competitiveness will improve. Even
though a broadening in the tax base means that the household
sector will bear a larger sales tax burden, low and
middle-income households are being compensated with
a transitional one-time credit and a permanent credit.
Furthermore, some of the savings to business from removing
embedded sales taxes and streamlined tax administration
get passed onto consumers through lower
prices. Past experience of sales tax harmonization in
Québec and the Maritimes in 1997 suggests that overall
price level, or inflation as measured by the CPI, does not
increase as a result of harmonization. Instead, relative
prices of goods and services within a typical household’s
consumption basket are likely to change

Today’s budget marks a major step forward to raising
Ontario’s competitiveness. Undeniably, not everyone will
benefit from sales tax harmonization in the short term. And
many might question the government’s decision to allocate
billions of dollars of precious revenues to lower business
income taxes. However, over a longer term horizon, these actions should represent a win for businesses, households
and governments as new investment translates into higher
employment, income and government revenues.

CIBC World Markets – Avery Shenfeld and Meny Grauman

All told, the removal of the sales tax burden on nonfinancial
business and the rate reductions, together with
earlier enacted cuts at the federal and provincial levels,
will see the marginal effective tax on new investment fall
from 32.8% to only 18.9% after July 1, 2010 (Chart 3),
and to 17.3% by 2013. The business sector will also
benefit from pension reforms that will allow definedbenefit
plan sponsors to spread out solvency payments
over a longer period, a pressing need given the recently
poor performance of capital market investments…

Scotia Economics: Mary Webb

In the extremely competitive environment anticipated as an economic recovery takes hold, this Budget focuses
on elevating Ontario’s competitiveness. Near-term, an essential part of this strategy is the $33.6 billion of
infrastructure spending anticipated over FY10 and FY11, following investments of more than $18 billion during
the prior two years. Mirroring Ottawa’s guidelines, the provincial funds must be spent in the next two years, and
the projects must reflect additional investments that otherwise would not have occurred.

First steps in the Province’s Poverty Reduction Strategy include
raising the maximum annual payment per child under the Ontario Child
Benefit from $600 to $1,100 as of July 2009, two years ahead of schedule.
A 2% increase for the benefits under the Ontario Works and the Ontario
Disability Support Program and the comfort allowance for long-term care
residents is proposed for FY10. For the repair and energy retrofits for social
housing units, more than $700 million is allocated over the next two years,
with an additional $360 million for new affordable units for low-income
seniors and individuals with disabilities.

Treasury Board President Vic Toews just tabled 95 “Reports on Plans and Priorities”, known around Ottawa as RPPs. These are important documents for reporters and anyone interested in keeping a close eye on government because, as Toews says in his press release, they “are forward looking documents that provide expenditure plans over a 3 year period.”

Now bear with me for a moment and let me explain why this year's RPPs are extra-special.

For the first time, the government is moving ahead on a plan to report its financial position using “accrual accounting”. The government does a good job, I think, explaining what this means:

Accrual accounting refers to a method of accounting that records transactions to reflect revenue in the period in which it is earned and the consumption or use of goods and services rather than when cash is received or paid as it is in accounting on a cash basis.

One of the main benefits of accrual accounting is that it recognizes the life-cycle costs associated with assets.

For example, a department purchases a fleet of trucks for $1.2 million. The trucks have a useful service life of six years. Under the cash method, the full $1.2 million would be reported as expenditure in the first year, and nothing in the subsequent five years. However, under the accrual method, the accounts would record the same purchase much differently. The $1.2 million would be reported as an asset in the first year and, for each of the six years the trucks are in service, $200,000 in expense would be reported to reflect the use of the trucks.

Accrual information clearly presents a very different—but more accurate—picture of the organization's financial results and situation.

By providing RPP financial information on an accrual basis, parliamentarians are better able to compare departmental plans and priorities with the information in the Government's budget, in end-of-year results outlined in the Government's financial statements in Public Accounts and in Departmental Performance Reports, all of which are also presented on an accrual basis.

All RPPs will include financial information on accrual basis in two years.

It is important for parliamentarians—and by extension all Canadians—to understand what the government is doing, why it is doing it, and what results are being achieved. That is why the Government tables in Parliament a number of key documents that explain the Government's objectives and then reports on progress against those stated aims. This is known as the Estimates process.

RPPs are part III of the Estimates process. They provide further details on the information provided through the Main Estimates. Once the fiscal year is over, Departmental Performance Reports provide individual department and agency accounts of accomplishments against plans and expected results set out in their RPPs. These are normally tabled in the fall.

The government doesn't say this but let me say it: This is how most of the world accounts for things.

There has been a resistance at the federal government level to move to this kind of accounting for this reason: Governments in our parliamentary system can only spend if MPs in the House of Commons vote for that spending. “… [accrual accounting] does provide more information to us,” former Conservative MP John Williams once said — and Williams was, by trade, an accountant — “but remember we vote money on an annual basis. We don't vote money on an annual basis and if you have some left over you can carry it around and spent it another time.”

So what does that mean to everyday Canadians?

Well, let's go back to the example of the trucks. The way it works now is the government must spend and acount for the $1.2 million for trucks right now, this year. Government money only comes from one place — you and me. That means taxpayers in the current year have to come up with the full cost of those trucks right now even though taxpayers in future years will clearly enjoy the benefits — benefits that they don't have to pay for. Now, if the government goes into deficit to pay for those trucks, then taxpayers of future years get to pay for those trucks — plus interest! Taxpayers don't like deficits and so governments will tend to avoid buying the trucks and that, in turn, can have service consequences.

Now if the governnment could apply accrual accounting, then taxpayers today could acquire the trucks, the trucks show up as a government asset on the books, and taxpayers this year get “charged” $200,000″ for their use. Taxpayers next year, who are also enjoying the benefit of the trucks, also get charged $200,000, which must come from their taxes, and so on until the trucks have no asset value left. That, many think, is a more fair way for governments to acquire and pay for public goods which benefit many generations of taxpayers.

I quoted John Williams a minute ago and now I can tell you the context of the discussion he was having.

Public Works and Government Services Canada wanted to build a new office building for civil servants. Public Works looked at all the options so far as building and owning a new building or leasing a new building. PWGSC real estate managers concluded the best long-term course of action for taxpayers would be to build a new building rather than sign a lease agreement. But the government of the day was going to proceed with the leasing arrangement. Why? Building a new building would cost taxpayers now, say, $50 million and there was not $50 million in the current year's budget for such a big one-time expense. A 20-year lease for the same building would be about $5 millino a year and, yes, there was room in the budget for a $5 million expense. But of course, over 20 years, the government, had it owned the building, would have paid $50-million and then still had an asset with some value. Instead, over 20 years, it will pay $100 million in rent and have no asset to show for it at the end of that period.

So why don't we change the way Parliament does things? You'll love this answer: Because that would require changing the Constitution and that requires the agreement of the Provinces and, voila, we are into protracted and likely unsuccessful Constitutional negotiations.

Until that time, the government is going to try to, essentially, maintain two sets of books — the new accrual accounting and the old-fashioned parliamentary cash accounting. Accrual accounting's advocates hope that in showing how well accrual accounting can work and how policy decisions could be improved, perhaps the impetus will build for that constitutional change.

Parliament's independent budget watchdog says the economy is in much worse shape [pdf] than Finance Minister Jim Flaherty predicted just weeks ago when he tabled the 2009 federal budget.

Parliamentary Budget Officer Kevin Page told the House of Commons finance committee that the current recession will be “sharper” [pdf] than the one Flaherty spoke of when he tabled the budget on Jan. 27 and that means deficits that will be deeper and thousands more Canadians are likely to lose their jobs.

He also said Canada's economy has slowed more rapidly than during the recessions of the 1980s and 1990s.

“We think what we're seeing now is absolutely historic in terms of quarter-to-quarter declines,” Page told the finance committee Wednesday . . . [Read the rest of the story]

Technorati Tags: budget 2009, economy

Prime Minister Stephen Harper's Spring Break will consist of two days in Jamaica. The PMO announced this evening that Harper will visit Jamaica for two days in April — April 19-20.

On Monday, Prime Minister Stephen Harper met with the Honourable Dr. Kenneth Baugh, Jamaica’s Deputy Prime Minister and Minister of Foreign Affairs and Foreign Trade. It was Baugh's first official visit to Canada. (The PMO provided the photo at left of Harper's and Baugh's meeting)

“The visit will give Canada the opportunity to strengthen its partnership with Jamaica, one that is based on important political, commercial, and personal links. It will also reaffirm Canada's special relationship with the Caribbean,” the PMO said in a note to reporters announcing the visit.

The Jamaica visit will come right after Harper's attendance at the annual Summit of the Americas, April 17-19, in Trinidad and Tobago.

So that's the PM's spring break – four or five days in Caribbean almost all of which he'll spend in meetings.

Next Tuesday, incidentally, Harper jets to London, England for the G20 summit. The day after that wraps up, Harper heads to the NATO Heads of State meeting in Strasbourg, France, before returning to Canada on April 4.

The Jamaica trip is up after that.

(Of course, Ottawa, Jamaica, London, Strasbourg– the weather in any of those places is better than what Calgary went through this weekend.)