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Archived - Budget in Brief

The Honourable Paul Martin P.C., M.P.
Minister of Finance
Monday, February 28, 2000

Also published as Chapter 1 of the Budget Plan.

• Adobe Acrobat Version (167,269 bytes).

Table of Contents

• Budget 2000.
• Maintaining Sound Financial Management.
• Five-Year Tax Reduction Plan.
• Making Canada's Economy More Innovative.
• Improving the Quality of Life of Canadians and Their Children.
• Summary of Spending and Tax Actions.

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Budget 2000

Canada is now in an era of budget surpluses.

When the Government first took office in 1993, it set out a plan to restore the nation’s finances, build a stronger, more innovative economy and improve the quality of life for all Canadians. The plan is working.

The deficit is eliminated, the debt burden is falling, our unemployment rate is at its lowest level in more than 20 years and disposable income is rising.

With a growing economy and our nation’s finances in order, this budget charts a course to greater prosperity for all Canadians in the 21st century. Today’s better finances will be used to help build better lives for all Canadians, now and for future generations.

Crucial to a higher quality of life is ensuring that we continue to increase resources for post-secondary education and improve our system of universal health care.

A key component of the Government’s plan is to cut taxes. This will mean more money in the pockets of Canadians, stronger economic growth and enhanced job creation.

Canadians know that much of our future success hinges on building a stronger, more innovative economy. Developing the know-how, products, skills and services to keep the economy growing is essential to improving our quality of life.

That is why this budget:

• announces a $2.5-billion supplement in the Canada Health and Social Transfer (CHST) – the fourth consecutive federal enrichment of the CHST – to help provinces and territories meet what Canadians have clearly identified as their highest priorities: health and education;
• puts forward a five-year plan to reduce taxes by at least $58 billion, immediately restores full indexation of the personal income tax system to protect taxpayers against inflation and cuts tax rates for the first time in 12 years;
• proposes initiatives to promote leading-edge research and innovation in universities, research hospitals and the private sector; develop new environmental technologies and improve environmental practices; and strengthen provincial and municipal infrastructure; and
• increases significantly the income support available to parents by increasing the Canada Child Tax Benefit and enhancing parental benefits.

For further information on budget measures other than those explained in this booklet, please contact the Distribution Centre at the address provided on the last page, or visit the Department of Finance Canada Web site at www.fin.gc.ca.

This budget sets out the federal government’s plan for Canada in the 21st century. The economy of today is global, increasingly knowledge-intensive and built on instant communication. The federal government’s plan is designed to make Canada a leader in this new economy in order to increase the standard of living and the quality of life of all Canadians.

The plan is based on maintaining sound financial management, providing tax relief, building an innovative economy and investing in skills and knowledge to ensure Canadians have the tools they need for better jobs now and in the future. It strengthens post-secondary education and health care and helps children get the best possible start in life.

This budget provides:

• a $2.5-billion increase in the Canada Health and Social Transfer to help the provinces and territories fund post-secondary education and health care – the highest priorities of Canadians;
• a five-year tax reduction plan that will restore full indexation to the personal income tax system, cut core tax rates for the first time in 12 years, and reduce personal income taxes on an annual basis by an average of 15 per cent by 2004-05. The Plan will reduce taxes by a cumulative amount of at least $58 billion over the next five years; and

• a series of initiatives, totalling $4.1 billion between 1999-2000 and 2002-03, to promote innovation and leading-edge research, develop environmental technologies and practices, and strengthen federal, provincial and municipal infrastructure.

The actions set out in this budget to improve the quality of life of Canadians and their children are part of an overall four-part plan: Maintaining Sound Financial Management The Government is committed to low inflation, balanced or surplus budgets and a declining public debt burden. These are fundamental conditions for sustained economic growth and job creation, which in turn enable the Government to make investments in key priorities and provide substantial tax relief. Providing Tax Relief The Government believes that tax reduction is essential to improving living standards. It increases productivity, creates jobs and leaves more money in the pockets of Canadians. Making Canada’s Economy More Innovative In the modern global economy, the nations that thrive will be those that excel at innovation. That is why the Government is increasing its support for the kind of groundbreaking research that will provide new ideas, products and services and generate continued economic growth in Canada. Investing in Skills and Knowledge Skills and knowledge are the best guarantees of higher incomes, greater job security and expanding opportunity for all Canadians. The Government is increasing its support of university research and providing further tax assistance to students on scholarships.

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Maintaining Sound Financial Management

The Government’s commitment to sound financial management – maintaining low inflation, keeping the budget in balance or surplus and reducing the debt burden – has allowed the Canadian economy to expand at a healthy pace and exceed the expectations of virtually all forecasters.

Economic Outlook Is for Continued Strong Growth

The economy grew strongly in 1999, with real GDP growth estimated to have averaged 3.8 per cent.

Private sector forecasters expect continued robust economic growth in 2000 and 2001.

Both the International Monetary Fund and the Organisation for Economic Co-operation and Development expect Canada to post the second fastest economic growth among the Group of Seven (G-7) major industrial countries in 2000 and to lead in job creation.

Unemployment Rate at Its Lowest Level in 24 Years

Last year marked the third consecutive year of strong job growth, with 427,000 jobs created during the year and almost 1.3 million jobs created since the end of 1996.

By the end of 1999, the unemployment rate was down to 6.8 per cent, its lowest level in almost 24 years.

Increase in Disposable Income

The strong job market performance has contributed to solid personal income growth. Real after-tax income improved for the third consecutive year in 1999. It has risen about 3 per cent in per capita terms since 1996, and private sector forecasters project that it will continue to increase significantly in the years ahead.

Sustained Low Inflation

Inflation has picked up somewhat in recent months, mainly reflecting higher fuel prices due to a strong increase in world oil prices. In December 1999, the year-over-year consumer price index inflation rate was 2.6 per cent while the inflation rate (which excludes the impact of food and energy) was 1.6 per cent. Inflation is expected to return to the mid-point of the 1-to-3 per cent target band set jointly by the Government and the Bank of Canada.

Strong Consumer and Business Confidence

Domestic demand has been buoyed by strong employment and income growth, which, together with low interest rates, have boosted consumer confidence. Business confidence has bounced back sharply since the end of 1998 and is now equal to the record high reached in mid-1997.

Budget 2000 Delivers:

Balanced Budgets or Better

• A balanced budget or better is expected for 1999-2000. The Government is committing to balanced budgets or better in 2000-01 and 2001-02. This would be the first time in 50 years that the budget has been in surplus or balance for five consecutive years. In fact, since Confederation there have been only two other occasions when the Government of Canada recorded balanced budgets or better at least five years in a row.

Continued Prudent Approach to Budget Planning

• The Government will continue to follow its prudent and transparent approach to budget planning. In accordance with the Debt Repayment Plan, it will continue to use the Contingency Reserve to reduce public debt in those years when it is not required.

Debt Burden

• The Debt Repayment Plan and sustained economic growth will ensure that the debt-to-GDP ratio – the level of the debt in relation to the country’s annual income – remains on a permanent downward track. From a post-World War II peak of 71.2 per cent in 1995-96, it is expected to fall to about 55 per cent by 2001-02 and to below 50 per cent by 2004-05.

Controlling Spending

• From 1997-98, when the budget was first balanced, to 2001-02, the growth in program spending will be held to roughly the growth in population and inflation. As a percentage of GDP, it is projected to fall to 11.6 per cent in 2001-02 from 12.4 per cent in 1997-98 – the lowest ratio in half a century. Total program spending in the coming year will be $4 billion below the 1993-94 level.
• Since the federal budget was balanced, fully two-thirds of all new spending has been directed towards health, access to knowledge and skills, and innovation.

International Perspective

• By the accounting standards used in most other G-7 countries, the federal government will post a financial surplus for the fourth consecutive year in 1999-2000 – the only G-7 country to do so.

• Canada recorded the largest improvement in its financial balance of all G-7 countries from 1992 to 1999.

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Five-Year Tax Reduction Plan

In the fall of 1999, the Government promised Canadians in both the Speech from the Throne and The Economic and Fiscal Update that it would set out a multi-year plan for further tax reductions. With significant planning surpluses now available, this budget delivers on that commitment by making the most important structural changes to the Canadian federal tax system in more than a decade, with a special emphasis on the needs of families with children.

Five-Year Tax Reduction Plan Delivers:

Personal Income Taxes

Full Protection Against Inflation in the Tax System

• In a fundamental break with the past, the Five-Year Tax Reduction Plan immediately restores full indexation of the personal income tax system to protect taxpayers against inflation – this will benefit every Canadian.
• Full indexation will stop the automatic tax increases and benefit erosion that have occurred under Canada’s tax system since the mid-1980s. For example, the real value of benefits such as the Canada Child Tax Benefit and the goods and services tax credit will no longer be eroded by inflation.

Reduction in Personal Income Tax Rates

• For the first time in 12 years, a federal income tax rate – the middle tax rate – will be lowered. The Plan reduces the middle tax rate to 23 per cent from 26 per cent, starting with a two-point reduction to 24 per cent in July 2000. This will cut taxes for 9 million Canadians.

Increases in Income Thresholds at Which Personal Income Tax Rates Apply

• Canadians will be able to earn more income tax-free and more of their income will be taxed at lower rates.
• The Plan increases the amount of income Canadians can receive tax-free to at least $8,000 and the income amounts where middle and upper tax rates begin to apply to at least $35,000 and $70,000 respectively.

Enrichment of Canada Child Tax Benefit

• The Plan enriches the Canada Child Tax Benefit so that by 2004 an additional $2.5 billion annually will be provided to low- and middle-income families with children. This will bring total benefits to more than $9 billion annually. Maximum benefits will rise to $2,400 for a first child and $2,200 for a second child.

Elimination of the Deficit Reduction Surtax

• The Plan eliminates, as of July 1, 2000, the 5-per-cent deficit reduction surtax on middle-income Canadians with incomes up to about $85,000, and completely eliminates it by 2004.

Investments in RPPs and RRSPs

• The Plan raises to 25 per cent for 2000 and to 30 per cent for 2001 the permissible foreign content of investments in registered pension plans and registered retirement savings plans.

Encouraging Innovation and Investment

The Five-Year Tax Reduction Plan will also help Canada become more competitive internationally by making the tax system more conducive to investment and innovation.

Reduce Corporate Income Tax Rates

• The Plan reduces corporate tax rates to 21 per cent from 28 per cent for businesses in the highest taxed sectors, such as high-technology services, to make these businesses more internationally competitive. The reduction starts with a one-point cut effective January 1, 2001.

Reduce Small Business Tax

• The Plan will reduce the general corporate tax rate to 21 per cent from 28 per cent on small business income between $200,000 and $300,000 effective January 1, 2001.

Enhance Tax Treatment of Capital Gains

• To stimulate risk-taking and greater access to financing for small businesses, the Plan:

• reduces the capital gains inclusion rate from three-quarters to two-thirds;
• postpones the taxation of gains on qualifying stock options to when the shares are sold rather than when the options are exercised; and
• allows a tax-free rollover of capital gains on qualified investments from one small business to another.

Tax Plan Impacts

The Plan will reduce taxes by a cumulative amount of at least $58 billion over the next five years.

On an annual basis, the Plan will reduce personal income taxes by an average of 15 per cent by 2004-05.

• For low- and middle-income Canadians, the Plan will reduce net personal income taxes by an average of 18 per cent.
• For families with children, the Plan will reduce net personal income taxes by an average of 21 per cent.
• A typical one-earner family of four with about $35,000 of income will pay no net federal personal income tax.
• A typical one-earner family of four with income of $40,000 will have its net federal personal income taxes reduced by $1,623 a year by 2004 – a reduction of 48 per cent.
• A typical two-earner family of four with income of $60,000 will have its net federal personal income taxes reduced by $1,546 a year by 2004 – a reduction of 27 per cent.

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