TORONTO — Canadians should expect cuts to some government programs, as well as hundreds of dollars in additional annual employment insurance premiums, over the next five years as the government strives to balance its books, economists say.
Finance Minister Jim Flaherty’s promise is balance the books by the 2015-16 fiscal year doable, but only if the government shows significant spending restraint, said Alex Laurin, a senior policy analyst with the C.D. Howe Institute.
It won’t be easy for the government to maintain such a low rate of spending, and could result in some unpopular decisions, Laurin said Friday.
“This would affect everyone looking for something new, for a new program to be created,” he said.
“Not creating any new expenses is always a restraint because there’s always new demands on government, and as the population ages there will be new demands, and they’ll have to say no for a while.”
Flaherty said Thursday that Canadians can now expect five years of budget deficits — two more years than originally promised — and those deficits will be deeper than originally forecast.
He said Ottawa will balance its books by squeezing growth in public spending and relying on higher tax revenues from a growing economy, not increasing taxes or cutting transfer payments to the provinces.
The experts suggest a streamlining of the civil service is expected and a reduction in business subsidies and grants to a variety of groups are also in the cards.
However, TD Bank chief economist Don Drummond emphasized that Canada isn’t entering “a draconian era of fiscal restraint.”
He said the ratio of debt to GDP may creep as high as 35 per cent, but this is nothing compared to the 69 per cent level it hit in 1995, or the 100 per cent it’s expected to hit in the United States.
“It’s certainly not like the program review of 1995, but they will have to screw things down quite a bit relative to the history of the last 12 years,” Drummond said, referring to massive cuts made to provincial transfer payments by the Chretien government in an effort to eliminate the deficit in the mid-’90s.
Drummond said Ottawa will likely exempt about 50 per cent of its current spending — including defence and provincial transfer payments — from restraint, meaning the other half of government spending will be hit particularly hard.
“Think about the math: if you have to get the total to three per cent, the 50 per cent they’ve exempted will probably grow something like five per cent, so the rest of it will have to grow only about one per cent,” he said.
“Some programs will have to be trimmed and potentially some programs will be cancelled.”
The government can rely on at least one major boost to revenue from legislation that requires employment insurance premiums to be raised if the program runs a deficit, Laurin said.
Although there are limits on how much Ottawa can raise premiums each year, Laurin said it’s likely the government will raise them by the maximum allowable rate every year for the next five years in order to eliminate the deficit in EI created by burgeoning unemployment rates.
Currently, earnings up to $42,300 are taxed at a rate of 1.73 per cent for employment insurance, and the government is allowed to increase that rate by 0.15 percentage points each year.
This means that by 2014, anyone earning $42,300 or more will likely be paying $1,049.04 per year at a taxation rate of 2.48 per cent — $317.25 more or a 43 per cent increase from the current maximum premium of $731.79.
The increase will also take a significant toll on employers, who must contribute 1.4 times the amount deducted from employees’ paycheques — in this case, $1,468.66 per employee, or $444.15 more than the current maximum.
“In the fiscal update Finance Minister Flaherty released on Thursday, he showed that he plans to raise $19 billion in new revenue by increasing the employment insurance payroll tax. Yet he’s telling Canadians the opposite, that he won’t raise taxes,” Mulcair stated.