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Aim high, spend low: Federal budget 2019

March 19, 2019

5-minute read

Despite a “surprise” boost in government revenue due to the strong economy, there aren’t many big ticket items compared to previous Liberal budgets.  There are actually big risks in baking big programs into the budget before an election, as all the parties can use the increased fiscal room for their own platform priorities without affecting the deficit. Just ask the 2005 Martin government, whose pre-budget child care program was cancelled and rolled into the unhelpful Universal Child Care Benefit by the incoming Conservatives.  My bet is that bigger promises will appear in the election platform.

On the macro front, Budget 2019 announces another surprise revenue boost (since the fall economic update) of $6 billion this fiscal year (ending in 12 days) and $5 billion for each of next two years. Combine that with the $3 billion “risk adjustment” that is just subtracted from revenues and you’ve got some serious money available without changing the deficit figures at all. There was so much extra money that the gas tax transfer to cities got a $2.2 billion kick in the pants with the cheque going out the door before March 31, a short-term boon for city infrastructure. But with a deficit of only 1% of GDP (roughly $20 billion a year), the debt-to-GDP ratio is actually falling: the government could have spent roughly $10 billion more this year (ahem, the cost of a universal pharmacare program) and kept that ratio constant.

Housing affordability is a big issue for many young Canadians who have been on the losing end of 10%-per-year house price increases. The challenge is to balance their interests with those of existing homeowners who are enjoying (and relying on) the appreciating value of their homes. For the past decade, that was achieved by letting new home buyers rack up historically high mortgage debt. That particular approach has largely run its course, so the government is introducing two new types of debt millennials can access to buy a house: their RRSP savings, and a new no-interest loan/equity stake (home mortgage) offered by the Canada Mortgage and Housing Corporation (CMCH).

In the short term, these programs will make it easier for people to afford homes, although at the cost of owing CMHC and having to pay back into personal RRSPs. The trouble is that access to these new types of debt, even if they are interest free, will likely further drive up house prices until, say, next year around this time. The affordability benefit is wiped out and we’re back to where we started.

There is no shortcut to housing affordability. But the government should be meeting millennials where they are, which is the rental market. There is plenty of money in previous budgets for affordable housing focused on low income households. These are laudable and important efforts, however, they won’t necessarily have a big impact on middle class renters. That group needs purpose-built rental apartment buildings, in other words—not condos—to reduce high rental costs while they wait out housing prices. Measures on that front were much less a focus in this budget.

Workplace training is another important issue addressed in Budget 2019. Employers often bemoan the “skills mismatch” that they say results in their not being able to find the employees they need. This is supposed to be the workers’ fault, even though recent generations of Canadians are the most educated in the industrialized world (and have the student debt to show for it). Despite historically low unemployment, these workers have also not seen raises anywhere near where they should be. A new Canada Training Credit in the 2019 budget will provide workers with $250 a year from the feds (which workers have to match) to get the training employers want. (Incidentally, average university tuition went up $220 last year.) This is combined with a four additional weeks of EI leave so workers can get training at EI expense and get off the company payroll.  

While employers are vocal about the skills mismatch, they are completely missing in action when it comes to funding on-the-job training. These initiatives let them off the hook. Canadian employers spend far less on training than employers elsewhere. Forcing workers with high student debt to spend even more on training is just not fair. The government could have nationalized the Quebec approach of requiring employers who don’t spend enough on training to pay into a training fund.

The Liberal government has been hyping pharmacare since the fall. The Hoskins commission that was struck to investigate the issue released its interim report just a few weeks ago. It made three recommendations, two of which are in this budget: the creation of a national drug agency, and the creation of a national formulary. The budget also included a co-ordinating body for catastrophic drug coverage, something most provinces offer.

It’s hard to tell what this will mean in practice, since the Hoskins commission’s full report isn’t expected until June and the government will not commit to a detailed plan until then. This budget therefore does not take a position on the big issue of whether pharmacare will mean a fill-the-gaps approach within existing coverage or a public, first payer system that targets drug costs. The budget highlights a possible $3 billion in savings through lower drug costs (a federal first payer system would save roughly $6 billion), which recognizes how we pay some of the highest per capita drug costs in the world. The CCPA will comment on the Hoskins recommendations when we see them.

There were some changes to seniors programs. CPP for seniors over 70 will now be auto-enrolled. The government knows your age and whether you’re eligible for CPP; there’s no excuse for not paying it out simply because a person failed to fill out some paperwork. Auto-enrollment is an obvious and important measure to make sure seniors receive the benefits they deserve. Call centres for old age benefits will also be beefed up to acknowledge that seniors are less likely to have a computer and go online.

Finally, there is a change in how much employment earnings one can make before Guaranteed Income Supplement money is clawed back. What’s interesting about this measure is that it doesn’t include CPP income, which is how the 2019 Alternative Federal Budget would structure it. If you’re getting GIS as a senior, you’re by definition in poverty, so the Budget 2019 measure supports working poor seniors as it exempts employment income. The reason why we targeted CPP income was it would give a break to low income seniors who aren't working (or can’t work), not just those who can.

There are some interesting turns on the tax front in Budget 2019. For one, the much loathed (by progressives anyway) stock option deduction has been capped. This was suggested in the fall of 2017, but then apparently abandoned. Under the plan announced today, you can still get $200,000 worth of stock options run through the deduction, which seems an absurdly high cap for rich executives, but as one of the most unequal tax expenditures its closure is a step in the right direction. The trouble is, in the absence of other tax changes CEOs and other top executives will just shift how they are paid (to stock awards, for example), which is the danger of a one-off approach to tax expenditures instead of a comprehensive review.  

To read the CCPA's response to Budget 2019, visit our website.

David Macdonald is a senior economist with the Canadian Centre for Policy Alternatives.

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