Budget Plan Including Supplementary Information and Notices of Ways and Means Motions Tabled in the House of Commons by the Honourable Paul Martin, P.C., M.P. Minister of Finance February 27, 1995 Department of Finance Ministère des Finances Canada Canada © Her Majesty the Queen in Right of Canada (1995) All rights reserved All requests for permission to produce this work or any part thereof shall be addressed to the Department of Supply and Services – Canada Communication Group – Publishing. Price: $25 Available from the Finance Canada Distribution Centre 300 Laurier Avenue West, Ottawa K1A 0G5 Tel: (613) 995-2855 Fax: (613) 996-0518 and from participating bookstores. Electronic versions also available from the same locations. Cat No.: F1-23/1995-2 ISBN 0-660-15567-2 INTRODUCTION AND OVERVIEW Table of Contents 1 Introduction and Overview............................................. 5 Policy Actions ................................................................. 6 Implications of Budget Actions........................................ 8 Outline of the Budget Plan ........................................... 10 2 The Economic Assumptions......................................... 13 Developing the Economic Assumptions......................... 13 The Canadian Economy is Expanding Strongly ............. 14 The External Environment............................................ 17 The Economic Assumptions for Canada ........................ 19 Comparison With Private Sector Projections ................. 21 Comparison With Previous Economic Assumptions....... 23 3 Status Quo Fiscal Implications of the Economic Assumptions............................................... 25 Changes From the 1994 Budget Forecast....................... 25 Status Quo Deficit Outlook to 1996-97 ........................ 28 The Need for Policy Action .......................................... 29 4 Budget Measures......................................................... 31 The Plan for Fiscal Action ............................................. 31 Getting Government Right........................................... 32 A Fairer Tax System – Sharing the Burden of Deficit Reduction ....................................................... 58 Summary of Fiscal Savings............................................. 65 5 The Fiscal Outlook....................................................... 67 Deficit Below Target in 1994-95.................................... 67 The Fiscal Outlook:An Overview................................. 68 Fiscal Outlook: Sensitivity to Economic Assumptions .... 76 The Revenue Outlook.................................................. 80 The Expenditure Outlook............................................. 83 Financial Requirements................................................ 88 Borrowing Authority..................................................... 89 3 INTRODUCTION AND OVERVIEW 6 Profile of Federal Department Spending ................... 91 Sustainable Development in the Natural Resource Sector .......................................................... 91 Transport Canada .......................................................... 97 Industrial, Regional, and Scientific-Technological Departments and Agencies............................................. 98 Justice and Legal Programs........................................... 102 Canadian Heritage....................................................... 104 Foreign Affairs and International Trade......................... 105 The International Assistance Envelope ......................... 106 Social Programs (Excluding Major Transfers)................ 107 National Defence ........................................................ 114 General Government Services ..................................... 115 Annexes 1 The Review of Forecasting Accuracy and Methods .................................................................... 121 2 The Government’s Response to the Main Recommendations of the 1994 Report of the Auditor General............................... 123 3 Task Force on Economic Instruments .................... 131 4 Canada–United States Fiscal Comparison .............. 135 5 The Spending Control Act ....................................... 139 6 Tax Measures: Supplementary Information and Notices of Ways and Means Motions ...................... 143 4 1 Introduction and overview The 1995 budget is the second in a two-stage process, initiated with last year’s budget, to sustain growth and create jobs by addressing the long-term deterioration of the financial condition of the Government of Canada. The 1994 budget proposed measures to reduce the federal deficit towards the interim target of 3 per cent of GDP by 1996-97, en route to the ultimate goal of a balanced budget. It stressed that while reduced government expenditure was necessary, cuts could not be the only element of a strategy to promote economic growth and job creation. Significant reform of the way government operates was also essential. A number of reviews were launched with the 1994 budget to provide the necessary background and to frame the consultations that would lead to decisions on reform. The government also committed to provide a mid-year update on the economic and fiscal situation and the implications for achieving the deficit targets. The Economic and Fiscal Update1, released on October 18, showed that owing to higher-than-anticipated interest rates, greater fiscal action would be required to achieve the deficit targets in 1995-96 and 1996-97. 1 Agenda: Jobs and Growth, Creating a Healthy Fiscal Climate: Economic and Fiscal Update, Government of Canada, October 1994. 5 INTRODUCTION AND OVERVIEW The release of the Update and its companion piece, A New Framework for Economic Policy2, initiated widespread consulta- tions on the economic and fiscal challenges facing Canada. The Finance Committee of the House of Commons held hearings across the country and made recommendations to Parliament on December 5. More than ever before, Canadians engaged in discus- sions about the nation’s fiscal future – with the Finance Committee, in meetings with the Minister of Finance across the country, through letters to Members of Parliament, by participating in discussions sponsored by the Canadian Foundation for Economic Education, and in general discussion. This widespread involvement in the fiscal dialogue demon- strates that the fiscal problems of this country go beyond the concern of investors and money markets. The issues affect the well-being of all Canadians. The Finance Committee’s report to Parliament recommended that far-reaching action be taken to turn the tide of fiscal deterio- ration. The vast majority of Canadians who expressed their views agreed. While recognizing that this would involve significant change, the alternative was seen as unacceptable – an unsustainable accumulation of debt, a lower standard of living and the loss of our ability to determine Canada’s future. The government agrees and will act accordingly to restore the nation’s fiscal health. Policy Actions This budget will fundamentally reform what the federal government This budget will does and how it does it. That reform is structural – i.e. it will change fundamentally permanently the way government operates. The objective is to get reform what government right so that it can fulfil its social and economic the federal mandates more effectively and sustainably. This will include deep government does and how cuts in the level of federal program spending – not simply lower it does it. The spending growth, but a substantial reduction in actual dollars spent. objective is This budget secures those savings and confirms the structural to get govern- changes that will ensure permanent fiscal health. ment right 2Agenda: Jobs and Growth, A New Framework for Economic Policy, Government of Canada, October 1994. 6 INTRODUCTION AND OVERVIEW In the past, departmental budgets have often been reduced with- out fundamental review or change in mandate or manner of deliv- ering public services. This often resulted in continued application of resources to lower-priority activities and a progressive loss in the capability of doing a good job on core responsibilities. This budget adopts a different course. Mandates for the govern- ment as a whole and each department have been examined and changed to bring them into line with modern realities, including the need for fiscal restraint. Lower priority programs have been elimi- nated or sharply cut back. Program delivery mechanisms have been made more efficient. As such, the changes to program spending are structural rather than transitory. Among the highlights of the actions described in detail in Chapters 4 and 6 are: ■ the budget implements the results of Program Review – a comprehensive examination of federal departmental spending. That review will cause the government to focus on what is essential, and to do it better. Three years from now, spending by federal govern- 1 ment departments will be $9 ⁄2 billion lower than it is today; ■ major changes in transfers to the provinces will renew and modernize the federal-provincial fiscal regime, making it more effec- tive, flexible and affordable; and ■ the budget sets the fiscal parameters within which labour market programs will be re-designed to foster increased employability. Tax measures play a small role in this budget. Personal income tax rates are not being increased. Some tax measures are being Tax measures taken, however, to ensure that all taxpayers pay what is owing. play