2005-2006 FEDERAL BUDGET
A SPECIAL AlphaLINK REPORT
FOR
CANADIAN HARDWARE & HOUSEWARES MANUFACTURERS ASSOCIATION
The purpose of this report is to summarize the federal budget for fiscal 2005-2006 that was tabled in the House of Commons on February 23, 2005. In particular, it will focus on identifying issues raised in the budget that may impact CHHMA members.
Initial response to the budget has dwelt at length on the relatively minor adjustments included for the 2005-06 fiscal year. Announcements on personal and corporate income taxes, the capital cost allowance and retirement savings all fit into this category. In assessing the true impact of the budget on themselves, CHHMA members are cautioned to bear this delayed impact of many budget provisions firmly in mind.
A recurring theme of the budget is the assertion that the recent appreciation of the Canadian dollar may create weakness in the Canadian economy, particularly in the shorter-term. Budget concern is also expressed that large U.S. deficits pose a further risk for Canadian economic growth. The budget states:
“The U.S. budget deficit poses an additional medium-term downward risk. If not corrected, the deficit could put upward pressure on interest rates, crowd out investment and dampen growth in both the U.S. and Canada. Conversely, a serious effort to reduce the budget deficit would temporarily lower growth in the U.S., which would also have negative implications for Canadian growth.”
In Canada, total trade and in particular exports to the U.S,, represents a higher proportion of GDP than in many other countries. As a result, the depreciation of the U.S. dollar has been a more significant economic development for Canada than for other major economies.
Primarily given uncertainty about U.S. economic prospects and their spill-over into Canada, the private sector forecasters to whom the Department of Finance traditionally turns for their views on the economic outlook have lowered their short-term prospects for GDP growth and interest rates. The following table provides details on their revised projections starting with the March 2004 budget, through the November 2004 Economic and Fiscal Update and on to the February 2005 budget:
` Average
2004 2005 2006 2007-2009
(per cent)
March ‘04 Budget 2.7 3.3 3.2 3.1
November ‘04 Update 3.0 3.2 3.1 2.9
February ‘05 Budget 2.7 2.9 3.1 2.9
March ‘04 Budget 1.4 1.7 1.9 1.8
November ‘04 Update 3.1 2.1 1.8 1.7
February ‘05 Budget 3.3 2.0 1.9 1.9
3-Month T Bill Rate
March ‘04 Budget 2.2 3.1 4.0 4.5
November ‘04 Update 2.1 3.2 4.4 4.7
February ‘05 Budget 2.2 2.7 3.5 4.6
10-Year Govt. Bond Rate
March ‘04 Budget 4.8 5.4 5.7 5.7
November ‘04 Update 4.7 5.0 5.7 6.0
February ‘05 Budget 4.6 4.6 5.1 5.6
March ‘04 Budget 7.5 7.2 7.0 6.8
November ‘04 Update 7.3 7.0 7.0 6.8
February ‘05 Budget 7.2 7.2 7.0 6.7
March ‘04 Budget 1.6 1.5 1.5 1.3
November ‘04 Update 1.7 1.6 1.5 1.2
February ‘05 Budget 1.7 1.4 1.5 1.4
March ‘04 Budget 4.7 3.8 n/a n/a
November ‘04 Update 4.4 3.5 n/a n/a
February ‘05 Budget 4.4 3.6 3.4 n/a
CHHMA members may wish to consider some of the following trends revealed by the above tables:
After renewed strength in 2004, global growth is expected to decline somewhat in 2005, as demand from the U.S. weakens and higher oil prices continue to affect oil-importing countries. Expansion should pick up in 2006, as OECD countries are expected to increase to 3.1 per cent from 2.9 per cent in 2005.
Real GDP in the Euro area is expected to grow by 1.8 per cent in 2005 as higher oil prices and a recent renewed appreciation of the Euro offsets solid global growth.
Japanese growth is expected to fall to 1.8 per cent in 2005 from 4.1 per cent in 2004 due to slower growth in global demand and the continued appreciation of the yen against the U.S. dollar.
Growth in China is also expected to slow in 2005. This country, however, is likely to remain an important contributor to growth in Asia as consumer demand strengthens and exports continue to increase despite slower growth in global demand.
SOCIAL POLICY OUTLOOK
It is not the purpose of this report to dwell at length on the Social Policy Outlook. It bears noting, however, that the Government’s new social policy spending plans carry with them a significant price tag that will escalate from a base of $823 in fiscal 2005-2006 to $1.47 billion in 2009-10, for a total projected new cost of $6.4 billion over the period.
CHHMA will likely agree with the broad statements of budget policy that read as follows:
“Sound macroeconomic policy – which includes low and stable inflation, prudent fiscal planning, balanced budgets, and falling government debt – is central to Canada’s economic policy framework. To be fully effective, this sound macroeconomic policy must be complemented with effective structural policies. These include free trade, a deeper Canadian economic union, efficient markets and a competitive tax system.”
and
“A fair, efficient and competitive tax system represents a critical foundation for a productive economy. Reductions in personal taxes provide greater incentives for individuals to work, save and invest in their skills and education. Reductions in corporate taxes create incentives for firms to invest in new equipment, undertake innovative research and continue to create jobs.”
A review of the budget provisions to follow will likely lead to the conclusion amongst CHHMA members that scant financial relief to personal and corporate taxpayers is being offered. Scaled over a period of several years, the effect of these changes will likely be regarded as minimal. The same observation applies to proposed increases in retirement savings limits.
The budget projects balanced budgets or better for the 2004-05 fiscal year that is now drawing to a close as well as in each of the next five years.
The budget maintains the annual $3 billion Contingency Reserve that, if not needed to deal with unforeseen circumstances, will go to debt reduction. It also sets aside additional amounts for economic prudence. If not required for such purposes, these additional funds will be “released to fund government priorities.”
The Government’s intention to lower the debt-to-GDP ratio to 25 per cent by 2014-15 is reaffirmed in the budget. The ratio is projected to be 38.8 per cent in the current fiscal year, declining to about 30.6 per cent in 2009-10. The ratio hit its peak of 68.4 per cent in 1995-96.
The Cabinet Committee on Expenditure Review has identified cumulative savings totaling almost $11 billion over the next five years.
The budget proposes to increase progressively the basic personal amount so that by 2009 the amount of income that all Canadians may earn without paying federal income tax will increase to $10,000 The schedule for increasing the basic personal amount will be as follows:
2005 $000
2006 100
2007 200
2008 400
2009 The greater of $600 and the amount necessary to bring the basic personal amount to $10,000
The increases are over and above the inflation protection provided by full indexation.
Retirement Savings.
The annual dollar limit on contributions to money purchase Registered Pension Plans will be increased to $22,000 by 2009 from $18,000 in 2005. Corresponding increases will be made to the maximum pension plan limit for defined benefit RRPs, bringing it to $2,444 per year of service by 2009.
The annual dollar limit on contributions to RRSPs will be increased to $22,000 by 2010 from $18,000 in 2006.
The RRP and RRSP limits will be indexed to average wage growth starting in 2010 and 2011 respectively.
Corporate Income Taxes.
The budget proposes to eliminate the corporate surtax in 2008 stating that this will be equivalent to a 1.12 percentage point reduction in corporate income tax rates for small and large businesses at that time. The general corporate tax rate will remain at 21 per cent through to the end of the 2007 taxation year before than being gradually reduced to 19.0 per cent by 2010.
The budget proposes several modifications to CCA rates to better reflect the useful life of certain assets. Most of these assets have no direct application to CHHMA members. The one exception may be combustion turbines that generate electricity where the rate will be increased from 8 per cent to 15 per cent in the 2005 taxation year.
Point to Consider
The budget states as follows:
“The Government will continue to review CCA rates which, as a general principle, should reflect useful life”
CHHMA may wish to consider recommendations that could be made in its next pre-budget submission on this point.
The budget states as follows:
“…the Government of Canada is prepared to work with its partners – provinces and territories, their colleges and training institutions, business and labour, and individuals, all of whom have a role to play – to ensure that workers acquire the skills they need to succeed. Budget 2005 makes an additional investment of $125 million over the next three years to work with stakeholders in moving forward on a Workplace Skills Strategy. This will include:
Points to Consider
This budget provision seems largely targeted on federal/provincial/territorial agreements for workplace training. Given the nature of federal/provincial/territorial. training initiatives, the benefit to CHHMA members seems negligible. The final bullet should be regarded by CHHMA, however, as somewhat interesting. Consideration could be given to whether there are projects that might meet the criteria contained in this point. Of interest it the fact that this proposal is being made with no reference to sector councils.
The budget points out that the Government proposes to introduce a new rate-setting mechanism that is expected to be in place for establishment of the 2006 rate. The budget
states a commitment to an employee rate for the next two years that will not exceed $1,95.
The budget announces that the Government is launching a consultation process with respect to financial institutions. The terms of reference for this study are contained as an Annex to the budget. Submissions are to be filed no later than June 1, 2005. A review of the terms of reference will be the subject of a separate AlphaLINK report to CHHMA..
The budget announces that the Government is increasing the deposit insurance coverage limit from $60,000 to $100,000, effective immediately.
ENVIRONMENTAL OUTLOOK
EnerGuide for Houses Retrofit Incentive Program
The budget allocates $22.5 million over the next five years to quadruple the number of homes retrofitted under the EnerGuide for Houses Retrofit Incentive Program. The new level of funding is estimated to support energy efficiency improvements to a total of 500,000 homes by 2010.
Environmentally Friendly Vehicles
The budget states that the Government is negotiating with the auto manufacturing sector to achieve an agreement that would improve the fuel efficiency of vehicles sold in Canada. It is also considering the merits of a vehicle “feebate” which is described as providing a consumer rebate for fuel-efficient vehicles and imposing a fee on fuel-inefficient vehicles. The Government is asking the National Round Table on the Environment and the Economy to develop options for a feebate and to make recommendations for next year’s budget.
Sharing Gas Tax Revenue
The budget says it will commit $5 billion in new money from the federal gasoline excise tax to support environmentally sustainable infrastructure. In the coming 2005-06 fiscal year, this funding will be equivalent to 1.5 cents of the federal excise tax on gasoline,
rising to 2.0 cents in 2007-08; 2.5 cents in 2008-09; and 5 cents in 2009-10. Translated into dollars, $600 million will be allocated in the 2005-06 fiscal year, increasing to $2 billion in 2009-10.
SPENDING OUTLOOK
The budget is 273 pages long. It is not until page 264 that the Government reveals the cost of its spending program. The Program Expenses Outlook is as follows:
2004 2005 2006 2007 2008
2005 2006 2007 2008 2009
(millions of dollars)
Major transfers
to persons 43,248 44,854 46,786 48,864 50,876
Major transfers
to other levels
of government 39,063 37,496 39,978 42,785 44,591
Direct program
Expenses 75,822 78,979 82,754 86,285 90,336
Total 158, 133 161,329 169,517 177,934 185,803
Paying for this significant spending increase will depend on sustained GDP growth. The Government has estimated that this spending in 2004-05 will consume 12.2 per cent of GDP, dropping to 11.9 per cent in 2008-09. If GDP does not expand at the rate forecast on page two of this report, questions will emerge as to how this level of spending is to be financed…increased taxes, deficit budgets.