Cutting it close

The Hill Times reports that after barely a year in office, the Cons have already damaged federal finances to the point where they'll face a choice between either presenting a largely goodie-free budget or going into a deficit:

Don Drummond, chief economist at the TD Bank Financial Group in Toronto, said the government should have fiscal room to live up to its commitment to correct the so-called fiscal imbalance; to introduce what many expect will be environmental tax incentives for individuals and businesses; to deliver the Tories' promised Working Income Tax Benefit; and to reduce taxes on capital gains. Beyond that, there will be little fiscal room for much else, such as "broad-based" tax cuts, Mr. Drummond said.

Correcting the fiscal imbalance alone, he predicted, will cost nearly $3-billion, and Finance Minister Jim Flaherty's fall fiscal update projected just $3.5-billion for "new spending and debt and tax reduction initiatives." The update predicted even smaller spending surpluses in future years, causing observers to wonder how the government will make the numbers add up...

"You have to bear in mind that they've only got $2-billion by 2009. So anything they do on the fiscal imbalance is going to carry on over time," Mr. Drummond said, pointing out that pouring $3-billion into the fiscal imbalance is not a one-time payment. "Even doing $3-billion a year would ultimately cause them a problem."...

Mr. Drummond said that, based on monthly economic numbers since the release of the update in November, he assumes that the Finance Department is working with numbers similar to those in the update. However, other economic projections, such as one from the Canadian Centre of Policy Alternatives in November, say the Tories will have more than $4-billion to spend...

Overall, Mr. Drummond said that he expects the government's plan to correct the so-called fiscal imbalance, including both equalization and new health and social transfers, to total nearly $3-billion, almost all of the Tories projected $3.5-billion planning surplus.

"I think that cosmetically they will add up all the all the money they transfer for infrastructure to the provinces and the municipalities and that will become a new, fourth major transfer. So you'll have four major transfers, being equalization, the Canada Health Transfer, post-secondary education, and the infrastructure transfer, and that will come up pretty much to $3 billion," he said.

For this year, it looks like the Cons should be able to keep the budget in the black while still offering up an election-type budget through a combination of highly-targeted giveaways and loosened projections. But even using the CCPA's more realistic estimates, the Cons appear to be moving the budget toward the red within a couple of years at most if they follow through on their current plans.

Which would presumably provide Flaherty with a much-longed-for excuse to take an axe to even more programs...assuming the Cons are in power long enough to send Canada's fiscal situation into the usual right-wing sinkhole.

Meanwhile, the article also gives a fairly detailed look at the NDP's stance on the budget through finance critic Judy Wasylycia-Leis. And to the surprise of no realistic observer (but surely the shock of a good chunk of Libs), the NDP doesn't plan to support anything that looks like the Cons' usual offerings:

Judy Wasylycia-Leis (Winnipeg North, Man.), the NDP finance critic, said considering that the government has committed to fix wait-times, the so-called fiscal imbalance, reduce taxes, increase the defence budget, and reduce the capital gains tax, there will be little room for anything else. Eliminating the capital gains tax alone would cost about $2-billion per year, she said, and to win support from the NDP, the government would have to scrap some its promises and provide funding for education, affordable housing, the environment and other programs.

"I would say that, with the combination of the dwindling surplus and lack of flexibility, and the ideological bent to these Conservatives which is focused on tax reductions and increased defence spending, it's going to make it very hard for use to find common ground. Really, what it would mean is that you'll have to scrap those plans and you'd have to start looking at really serious alternatives," Ms. Wasylycia-Leis said.

She said that with a budget expected to be focused on the fiscal imbalance, it may be that the Bloc Québécois will be the only party to support the government. "If that's their game plan, then maybe we're going to be looking at a situation where the Bloc's supporting the budget like they did this past year, and everybody else is clamoring for other priorities."

If the Cons are indeed going to put $3 billion into few-strings-attached transfers to the provinces, then it's entirely possible that the Bloc will end up keeping Harper in power until at least this fall.

Meanwhile, for anybody who wants to keep the federal government in a strong enough financial position to be able to do any good for Canadians, it doesn't look like the Cons' second budget is going to be any better than the first. And it shouldn't be news that the NDP (apparently along with the Libs) will respond accordingly if the Cons don't offer something far more positive.