OTTAWA - With an election on the horizon, Prime Minister Stephen Harper has begun delivering on tax breaks promised in the last campaign in 2011.
He set out part of a coming smorgasbord of tax goodies for Canadians in a campaign-style event last week in Whitby, where he announced an improvement in the tax credit for parents who have children enrolled in fitness or sports programs. The change will cost Ottawa about $35 million a year in forgone revenues.
In an unusual move, the Conservatives essentially made the enhanced children’s fitness tax credit retroactive, which will allow Canadians to see the benefit in the form of a slightly lower federal tax bill next spring — just as political leaders are gearing up for the 2015 election battle.
Tax measures are usually unveiled in the annual spring budget or, occasionally, in the economic update the finance minister delivers each fall. But Harper appears to be dispensing with that tradition.
Last month, Finance Minister Joe Oliver unwrapped a two-year, $550-million plan to reduce employment insurance premiums paid by small businesses. That change kicks in on Jan. 1.
Canadians can expect more of these good news announcements now that Ottawa is about to put an end to half a decade of budget deficits.
Although Harper says the books won’t be fully balanced until 2015, many observers believe it is already happening.
They note that, in the first four years of the current fiscal year, the federal government recorded only a marginal $800,000 budget deficit, far below the $4.5-billion deficit in the same period of the previous year.
So it’s widely expected that Oliver’s economic update in November will be highlighted by an announcement that the goal of returning to a budget surplus is being achieved this year.
“It would be difficult for them to show anything but a surplus for 2014-15 in the update,” said TD Bank senior economist Randall Bartlett. “If they do show a deficit, it’ll be so small that it really will be just a rounding error.”
By selling off embassies and other assets, reining in federal program spending and axing 19,000 public service jobs, the government has put itself in a strong fiscal position. TD Bank economists predicts Ottawa will run up cumulative budget surpluses of $56 billion over the next five years.
But who will benefit from federal tax cuts and possible increased spending initiatives, and exactly when any new measures will take effect, is unclear as the Conservatives jockey for political advantage with the upcoming election in mind.
“We are in the happy position for Canadians to be able to do it all, but not to excess,” Oliver told reporters on Thursday in Washington, where he was attending international meetings. “We will increase infrastructure payments, and we will reduce taxes, and we will be able to do all that and still stay in a surplus position.”
Harper’s 2011 election campaign promises included a popular array of tax breaks, but they have been on hold ever since because he made them contingent on the elimination of the $24.9-billion budget deficit. Besides a promise to enhance the children’s fitness tax incentive, the platform called for a doubling to $10,000 of the annual contribution limit for tax-free savings accounts, an adult fitness tax credit and the introduction of income-splitting for income tax filers.
Fulfilling most of these pledges would seem only a matter of time now that the deficit is disappearing. But income-splitting, which would allow couples with children under age 18 to share up to $50,000 of their income for tax purposes, has proven highly controversial.
The proposal is expensive — it would reduce federal revenues by $3 billion annually — and has been widely criticized because it would be of most value to couples with one spouse at home and the other in a high income bracket. An estimated 85 per cent of Canadians would see no benefit. For that reason, former finance minister Jim Flaherty had said income-splitting needed to be re-examined.
While some Conservatives insist their party can’t go back on its 2011 election campaign promise, others say income-splitting should be abandoned in favour of broader measures that would provide a tax break for a wider swath of families. Another option would be to balance the impact of income-splitting by improving existing programs meant to help low-income Canadians with children. But the Conservative caucus and the cabinet remain divided on how to follow up on this promise.
Fulfilling Harper’s 2011 tax pledges, however, would eat up only about one-third of expected budget surpluses over the next several years. So what to do with the rest of the billions in extra tax revenues is likely to be the subject of intense political debate.
The government has committed about $5 billion a year for infrastructure spending over the next decade, but Ottawa is under pressure from cities and provincial governments to do more to help rebuild aging bridges, sewer systems and roads. Oliver has said he would like to see stronger economic growth, and infrastructure investment provides a quick boost to the economy. It would also help with the job picture, which has been gloomy for most of the year.
Paying down the debt is another possible use of surplus dollars. The debt, the accumulation of annual budget deficits, now stands at $618 billion, up more than $150 billion since the 2008 recession. But Oliver has brushed aside suggestions that he chop away at the debt, saying the government is already on track to meet its target of reducing the debt by 2021 to a quarter of gross domestic product.
There are also demands for the government to reduce employment insurance premiums paid by employers and workers. The parliamentary budget office estimates the premium rate set by Ottawa means the federal treasury will over the next five years collect $4.5 billion more in EI payments than is needed to cover benefits going to the unemployed.
“A big chunk of the expected federal budget surpluses is coming from employment insurance taxes,” said Canadian Taxpayers Federation federal director Gregory Thomas. “Ottawa is using EI as a cash cow.” And this at a time when only a small portion of people who lose their jobs qualify for EI benefits, Thomas noted, adding that in Toronto the figure is only 17 per cent.
The government says that most laid-off workers who have paid into EI receive benefits, but the parliamentary budget office explains that because of the increase in part-time jobs and the growing number of long-term unemployed people who exhaust their EI support, fewer Canadians are receiving payments.
In the months ahead, while Canadians are likely to see more tax cuts and possibly a bit more spending from Ottawa, the overall thrust of Harper’s policies will continue to be government restraint.
“We’d like to grow faster,” Oliver said, speaking of the Canadian economy at a recent investment conference in New York. “We’re going to focus on creating more jobs, but the international financial environment is fragile. There are risks, particularly outside North America, and we have to remain fiscally responsible.”
- With files from Bloomberg