Jim Flaherty's budget reflects Canada's enviable financial status

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The Gazette, Wednesday, April 4, 2012

Jim Flaherty delivered his seventh budget last week, but his first as finance minister in a majority government. It made all the difference in preparing it, he was saying Monday afternoon, that he didn't have to worry about the government falling on it.

Flaherty is now the ranking finance minister among G7 countries, and it further enhances his standing in that exclusive club that Canada has such a good story to tell, a narrative he repeated in his budget speech.

"Canada is one of only two G7 countries to have recouped all the jobs lost in the global recession," Flaherty told the House. "Since July 2009 our economy has created more than 610,000 new jobs. The World Economic Forum says our banks are the soundest in the world. Forbes magazine ranks Canada as the best place in the world for businesses to grow and create jobs. Our net debt-to-(gross domestic product) ratio remains the lowest in the G7, by far."

And Canada's books will return to balance, indeed surplus, by 2015. As U.S. Treasury Secretary Tim Geithner has told Flaherty on many occasions, he envies Canada's position. The current U.S. deficit is about 10 per cent of GDP, or about the size of the Canadian economy. The Canadian deficit is cyclical, arising from the great recession of 2008-09. The U.S. deficit is structural, and decades away from any prospect of balancing the books, especially in systemically gridlocked Washington.

Ottawa sent mixed messages ahead of this budget. On the one hand it was going to be transformational, with serious cuts to operational spending and a review of entitlements such as Old Age Security. On the other, Flaherty kept saying the outcome of the spending review would be "moderate" and "modest," words that he repeated in his budget speech.

Because Canada's fiscal framework is solid - the forecast deficit of $21 billion in the new fiscal year is less than 1.5 per cent of GDP - Flaherty says the government didn't need to make "draconian cuts, as some other countries are doing," in order to balance the books. Or as he put it in the budget speech, he chose a course of "common sense, moderate restraint."

And so after all the noise about the spending review, the outcome is indeed quite modest: $5.2 billion in spending cuts to 2017, or only a 6.9-per-cent cut in operational spending and a reduction of only 1.9 per cent of total government spending. About 19,000 public-service jobs will be eliminated, mostly by attrition. The public-service unions must be much relieved.

As for the review of entitlements, Flaherty confirmed what we've known since Prime Minister Stephen Harper's Davos speech in January: Old Age Security will kick in at age 67 rather than at 65, but only beginning in 2023.

OAS is different from the Canada Pension Plan, which is separately funded and financially secure for the next 75 years. OAS comes out of the budget, indeed is the largest single program in the budget. It currently costs $38 billion a year, but the cost will leap to $108 billion by 2030. When it was created there were seven people in the workforce for every person collecting it, but the current ratio is four to one, and by 2030 it will be two to one. Those numbers simply are not sustainable.

Other measures, such as reviewing employer contributions to public-service and parliamentary pensions, are also in the realm of common sense. The best outcome in defined benefits in the private sector is 50-50 employeremployee contributions. Why should civil servants and MPs have a 60-40 deal?

In other ways, the budget is less about fiscal frameworks and very much a political statement. On aboriginal issues, Flaherty is developing job opportunities, but also seeking better outcomes in education and health for the $10 billion a year Ottawa spends on the First Nations. This comes largely out of Harper's January summit with aboriginal leaders.

On energy and the environment, the government proposes to streamline regulatory review of projects as the Northern Gateway pipeline. "One project, one review," Flaherty says. This is not normal budget-speak, but a clear political statement.

Sitting in the small boardroom of his fourth-floor office in Parliament's Centre Block, Flaherty is clearly at ease. After six years in office and seven budgets, he's become a commanding figure in the Harper government, clearly its strongest minister and best messenger.

But Flaherty also knows it doesn't go on forever.

"How do you feel about your shelf life?" he's asked at the end of the conversation.

"All politicians have a shelf life," he replies with a laugh. ""We get so much television exposure that at some point I think people just get tired of looking at us."

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