Thursday, March 4, 2010

Budget 2010/11 — Planting Seeds For Future Growth

Of course we knew that we couldn't look forward for any significant tax cuts or new spending initiatives. That was quite obvious. And it was obvious that the primary objective of the budget would be - restoring the fiscal balance. The only question was - how? Today, we've got the answer - apart from the small details, the government chose to stay on course.

There will be no draconian cuts, in fact, program expenses are projected to hit $257.7B in 2014/15. But, the economy is expected to grow even faster. Once the program expenses, as a percentage of the GDP go down from the current 15.6% to the typical 13% - the deficit will disappear. And, since the government pledged to exercise financial restraint (that is - to roll back some of the long term commitments for extra spending,) we can look forward for this to occur in the summer of 2014 - about a year earlier than predicted in the September fiscal update.

But there's more to that. Just like the previous budget, this budget too undertakes some steps towards setting up conditions for faster economic growth. Not with increased spending, but with the right fiscal policies. We saw some of that last year when Ontario and BC agreed to replace their sales taxes with a harmonized value added tax, (which has no cascading effect,) - thus slightly easing the tax burden on local businesses and making production cheaper.

Sure, the measure turned out to be extremely unpopular, because both provinces have failed to provide adequate compensation for extending the sales tax base, choosing to keep all the extra revenues to themselves. (At least they could have reduced their healthcare premiums.) But on the long run, this will add a few billions each year to the GDP growth - and that's why the Feds were willing to go as far as providing an extra $5.6B outlay to Ontario and BC to ease the transition costs.

This budget too plants seeds for future growth. Encouraging research and development, accelerating private sector investments, keeping federal tax-to-GDP ratio at its lowest level since 1961, along with the recently announced measures to curb the credit bubble - all that will add to the economic growth on the long run. In the end, we may actually see the deficit disappearing by the spring of 2013 - just as it was predicted in the last year's budget. And I hope however that, unlike 12-15 years ago, we won't see a certain party, that has pledged to vote against the fiscal restraint and economic growth measures today, taking all the credit for stronger growth and resulting increase in tax revenues several years from now.

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