FACT SHEETS: BUDGET 1995 Department of Finance Canada February 1995 Table of Contents1995 Budget: Key Actions and ImpactsOverview of the 1995 BudgetThe Economic and Fiscal SituationPrudent Economic AssumptionsThe Fiscal OutlookGetting Government RightSmaller Public ServiceReducing Business SubsidiesPrivatizing/Commercializing Government OperationsThe Canada Social TransferProtecting Elderly BenefitsTax Assistance for Retirement SavingsEliminating Deferral of Tax on Business Income1995 BUDGET: KEY ACTIONS AND IMPACTS- Key interim deficit target met: 3 per cent of GDP by 1996-97 --$24.3 billion- Debt-to-GDP ratio -- size of debt relative to the economy --begins to decline in 1996-97- Three-year savings of $29 billion; $25.3 billion fromexpenditure cuts- Almost $7 in expenditure reductions for every $1 in new taxrevenues- No increases in personal income tax rates- Dramatic cuts in departmental budgets -- some halved in threeyears- Smaller public service -- 45,000 fewer positions- Major reform of programs: agriculture, transport- Business subsidies cut 60 per cent- Programs merged, consolidated, commercialized- Increased cost recovery, including $975 immigration fee peradult immigrant- New Canada Social Transfer to provinces in 1996-97- Unemployment insurance reform intended to be in place July 1,1996- Course charted for public pension system reform- Tax fairness improved: tighter rules for tax deferrals, foreignand family trusts, R&D incentives- New measures to ensure collection of taxes owed- RRSP contribution limits reduced; retiring allowance rolloversphased out; overcontribution allowance cut- Higher taxes for corporations, large banks- Federal excise tax on gasoline increased by 1.5 cents per litreto help reduce the deficit OVERVIEW OF THE 1995 BUDGETThe Plan for Fiscal Action The 1995 budget introduces far-reaching action to restore thefiscal health that is essential for a strong and growing economy.The budget will fundamentally reform what the government does andhow it does it. It will bring a permanent change in the waygovernment operates. The objective is to get government right so that it can fulfillits social and economic mandates more effectively andsustainably. This will include deep cuts in the level of federalprogram spending -- not simply lower spending growth, but asubstantial reduction in actual dollars spent.Deficit Targets Will Be Met The budget actions deliver on the government’s commitment tomeet its interim deficit targets. The ultimate goal is a balancedbudget.- The interim deficit targets set out in the 1994 budget -- $32.7billion in 1995-96 and 3 per cent of GDP in 1996-97 -- will beachieved using prudent economic assumptions and incorporatingcredible fiscal action. The deficit could be well below targetsif economic performance is in line with the average of private-sector forecasts.- The significant reforms will ensure that spending will berestrained beyond 1996-97. The deficit will continue to fall.Major Elements of Expenditure Reform The budget is the second in a two-stage process that began withthe February 1994 budget. It takes fundamental action in thefollowing areas:- It implements the results of Program Review -- a comprehensiveexamination of federal department spending. As a result of thereview, government will focus on what is essential and will do itbetter.- It acts on a new vision of the federal government’s role in theeconomy, one that includes substantial reductions in businesssubsidies.- It introduces major changes in transfers to the provinces thatwill renew and modernize the federal-provincial fiscal regime,making it more effective, flexible and affordable.- It sets the fiscal parameters within which labour marketprograms will be redesigned to foster increased employability.Major Fiscal Actions Fiscal actions total $29 billion over the next three years -- byfar the biggest set of actions in any Canadian budget sincepostwar demobilization.- There will be about seven dollars in spending reductions forevery dollar of revenue increases.- Three years from now, federal spending on programs will be$10.4 billion (8.8 per cent) lower than it is today. Thecumulative expenditure savings in that period will exceed $25billion.A Fairer Tax System: Sharing the Burden of Deficit Reduction The budget reflects the government’s awareness of the heavy taxburden borne by Canadians and the cost this imposes on theeconomy. There are no increases in personal income tax rates. Tax measures are largely directed at removing preferences andincreasing fairness. To help meet the deficit targets, the budgetannounces increases in taxes on business and in the excise tax ongasoline. ___________________________________________________________ Total direct impact of budget measures 3-year[1] 1995-96 1996-97 1997-98 impact___________________________________________________________ (billions of dollars)Expenditure reductions Program review 3.9 5.9 7.2 16.9 Other 0.2 3.5 4.7 8.4 _______________________________________ 4.1 9.3 11.9 25.3 Tax measures Increase fairness and tighten tax system 0.1 0.4 0.6 1.1 Tax increases 0.9 0.9 0.8 2.6 _______________________________________ Total 0.9 1.3 1.4 3.7 _______________________________________Total direct impact of fiscal actions 5.0 10.6 13.3 29.0Ratio of expenditure reductions/ tax revenue increases 4.4:1 7.3:1 8.3:1 6.9:1_________________________________________________________________ [1] Three-year cumulative impact of deficit reductions shows thedirect reduction in net debt, by the end of the 1997-98 fiscalyear, arising from fiscal actions. Restructuring charges of$2.6 billion in 1994-95 are not included. These costs will beoffset over the three-year period by lower interest costsassociated with actions announced in this budget. Numbers may not add due to rounding._________________________________________________________________ THE ECONOMIC AND FISCAL SITUATIONEconomic Growth is Strong The Canadian economy is stronger than it has been for years.- Real output grew about 41/4 per cent in 1994, the fastest inthe G-7.- 433,000 jobs have been created in the past year -- all of themfull-time. The unemployment rate has fallen 1.7 percentage pointsto 9.7 per cent.- Manufacturing output is up over 9 per cent in the past year.- At 1.5 per cent, excluding the effects of last year’s tobaccotax reduction, inflation equals its lowest rate in three decades.- Unit labour costs in Canada have fallen 1.3 per cent since mid-1993.- Improved cost performance has led to record-breaking exports, agrowing trade surplus, and a dramatic improvement in the currentaccount.- Highest business confidence since 1979 underpins solidinvestment growth.Chart 1: Canada's trade position: Merchandise trade surplus The International Environment- Major overseas economies: Increased growth is expected in 1995and 1996, particularly in Germany and the U.K. The Japaneserecovery has been hesitant, but is expected to gain momentum.Slight inflation and short-term interest rate increases areexpected.- United States: Vigorous 1994 growth pushed unemployment downand inflation up. The Federal Reserve Board raised its benchmarkinterest rate from 3 to 6 per cent. Recent U.S. economicperformance -- inflation pressures build and monetary conditionstighten until the economy experiences a sharp slowdown -- could berepeated. It is assumed that U.S. short-term interest rates willincrease throughout 1995, peaking at 4 per cent in 1996. Thisshould cause U.S. growth to slow substantially in 1996 and coolU.S. inflation and interest rate pressures.Fiscal Impact: 1994-95 Based on expectations of improved economic growth, a moderaterise in interest rates, and the impact of the 1994 budget’srestraint measures, the 1994 budget forecast that the deficitwould decline to $39.7 billion in 1994-95 (including acontingency reserve of $2.4 billion). However, 1994 short-term interest rates rose 1 percentage pointmore than forecast and long-term rates were 2 percentage pointshigher. As a result:- Debt charges in 1994-95 will be $1 billion higher thanforecast.- But the impact of higher interest rates has been more thanoffset by lower program spending ($1.9 billion below the 1994budget forecast) and higher budgetary revenues ($1.2 billionabove the forecast).- The underlying deficit for 1994-95 is expected to be $35.3billion -- $4.4 billion lower than the target of $39.7 billion setin the 1994 budget. PRUDENT ECONOMIC ASSUMPTIONS Economic assumptions drive fiscal forecasts and determine thebudget action needed to achieve deficit targets. Overlyoptimistic assumptions lead to missed fiscal targets and damagedcredibility. Using prudent economic assumptions and takingsufficient fiscal action will ensure that deficit targets aremet.Key Variables Real growth, inflation and interest rates significantly affectthe fiscal forecast. Prudent projections have been developed foreach. While individually they could turn out differently,together they reduce the likelihood of missed targets.Economic Assumptions for Canada These assumptions are deliberately biased toward prudence --there is a better than even chance that the actual outcome,overall, will be more favourable.- Interest Rates: Mid-February short-term rates of about 8 percent were more than 400 basis points higher than 20-year lows inJanuary 1994. This reflects rising U.S. rates and financialmarkets’ concern regarding Canada’s financial situation. Short-term interest rates are assumed to average 8.5 per cent and long-term rates 9.7 per cent this year. In 1996, short-term interestrates are assumed to fall 100 basis points.- Output and Inflation: Strong employment growth and good tradeperformance points to continued robust growth in the first halfof 1995, despite relatively high interest rates. Real growth ofabout 3 3/4 per cent in 1995 is likely, possibly slipping to 2.5per cent in 1996 as higher interest rates weaken householdspending and slower U.S. growth hinders export expansion. The good economic performance in 1994 and 1995 willsubstantially reduce, but not eliminate, the amount of sparecapacity in the economy. Underlying inflation will be in the1 1/2 to 2 per cent range for both 1995 and 1996.Comparison with Private Sector Projections A February survey shows that the government’s economicassumptions are more cautious than the average private sectorprojection.- Views on real growth and inflation are similar for 1995. The government’s assumptions are below the private sector average for 1996. - Short- and long-term interest rate assumptions are higher thanthe private sector outlook -- by 70 basis points in 1995 and 60basis points in 1996.Comparison with Previous Economic Assumptions The major change to the economic assumptions over the past yearrelates to interest rates, which have been revised upwardssignificantly for both 1995 and 1996. Partly as a result, thereal GDP growth assumption for 1996 has been lowered._______________________________________________________________ Economic assumptions_________________________________________________________________ Actual Actual[1] Assumption 1993 1994 1995 1996_________________________________________________________________ Real GDP growth (%) 2.2 4.3 3.8 2.5GDP deflator increase (%) 1.1 0.6 1.6 1.8Nominal GDP $ billion 712 746 787 821 Growth (% change) 3.4 4.9 5.5 4.3CPI inflation rate (%) 1.8 0.2 1.8 1.8Employment growth (%) 1.3 2.1 3.0 2.0Unemployment rate (%) 11.2 10.4 9.5 9.491-day Treasury bill[2] (%) 4.8 5.5 8.5 7.510-year benchmark government bond rate (%) 7.2 8.4 9.7 9.0_________________________________________________________________ [1] The GDP figures are estimates.[2] The rate on 90-day commercial paper, which is approximately20 basis points higher than the 91-day Treasury bill rate, wasused in the February 1994 budget and the October Update. Thechange was made since the Treasury bill rate is more relevant fordebt-servicing costs._______________________________________________________________ THE FISCAL OUTLOOKFiscal Year 1994-95- The expected underlying deficit for 1994-95 of $35.3 billionwill be raised to $37.9 billion by one-time restructuring chargestotalling $2.6 billion related to the elimination of certaintransportation subsidies and public service reductions in the1995 budget.Fiscal Outlook With 1995 Budget Actions- Without the large fiscal actions in the 1995 budget, increaseddebt financing costs would drive the 1995-96 deficit $5.0 billionabove the $32.7 billion target. In 1996-97, the deficit woulddecline only to $34.9 billion, $10.6 billion above the levelrequired to meet the government’s interim target of 3 per cent ofGDP or $24.3 billion.- Fiscal actions amount to $5.0 billion in 1995-96, $10.6 billionin 1996-97 and $13.3 billion in 1997-98.- The budget actions ensure that the deficit falls to $32.7billion in 1995-96 and to 3 per cent of GDP by 1996-97 or $24.3billion -- the interim target. This is the lowest deficit-to-GDPratio since 1974-75.- The operating balance -- the difference between budgetaryrevenues and program spending -- will swing from a deficit of $4.0billion in 1993-94 to a surplus of $29.4 billion in 1996-97, thelargest such surplus relative to GDP since 1951-52. The dramaticturnaround in the operating balance is due to reductions inprogram spending.- The rate of growth in net public debt will slow significantly.By 1996-97, it is reduced below the rate of growth in theeconomy.- If economic growth and interest rates in 1995 and 1996 are inline with the average of private sector forecasts and thecontingency reserves are not needed, the deficit in 1996-97 wouldfall to about $19 billion, or 2.3 per cent of GDP. The debt-to-GDP ratio would decline from 73.2 per cent in 1994-95 to 71.8 percent in 1996-97.- Even using the prudent economic assumptions, the fiscal outlookwould continue to improve in 1997-98._______________________________________________________________ The Fiscal outlook[1]_______________________________________________________________ 1994-95 1995-96 1996-97 (billions of dollars)_________________________________________________________________ February 1994 budget deficit targets 39.7 32.7 -Impact of economic factors -4.4 5.0 - Status quo deficit 35.3 37.7 35.9Restructuring charge 2.6 - -Impact of actions to reduce deficit -5.0 -10.6February 1995 budget deficit 37.9 32.7 24.3_________________________________________________________________ [1] Includes impact of budget measures._________________________________________________________________ Revenue Outlook- Tax actions will yield $0.9 billion in 1995-96 and $1.3 billionin 1996-97.- In 1995-96, budgetary revenues are forecast to increase by 6.5per cent, with most of the growth associated with the 5.5 percent increase in nominal GDP. The measures announced in this andlast year’s budgets to improve tax fairness, tighten taxpreferences, increase user charges and adjust certain excise taxrates, also contribute to growth in revenues.- Revenue growth is expected to slow in 1996-97, advancing byonly 3.1 per cent as higher interest rates affect householdspending and slower growth in the U.S. restrains exportsexpansion.Expenditure Outlook- Total budgetary expenditures are expected to peak in 1995-96 at$163.5 billion, an increase of $600 million from 1994-95.- Program spending -- all spending except debt charges -- fallsdramatically from $120 billion in 1993-94 to $114.0 billion in1995-96 and to $107.9 billion in 1996-97.- By 1996-97, the ratio of program spending to GDP is expected tofall to 13.1 per cent, the lowest ratio since 1950-51.Financial Requirements- The government’s financial requirements, a measure of thefederal government’s borrowing on credit markets, will declinesharply from $26 billion in 1994-95 to $13.7 billion in 1996-97,due to the decline in the deficit over that period.- 1996-97 financial requirements are 1.7 per cent of GDP, thelowest ratio since 1974-75. GETTING GOVERNMENT RIGHTProgram Review OverviewThe Program Review was announced in the 1994 budget "to ensurethat the government’s diminished resources are directed to thehighest priority requirements and to those areas where thefederal government is best placed to deliver services." Its main objective was to review all federal programs in orderto bring about the most effective and cost-efficient way ofdelivering programs and services that are appropriate to thefederal government’s role in the Canadian federation. Ministers were asked to review their own portfolios and providetheir view on the federal government’s future roles andresponsibilities. Government programs and activities werereviewed using six tests: serving the public interest; necessityof government involvement; appropriate federal role; scope forpublic sector/private sector partnerships; scope for increasedefficiency; and affordability. The Program Review encompassed about $52 billion worth ofspending, excluding only major statutory programs.Structural Change in Government RoleThe Program Review will lead to long-lasting structural change inwhat the government does. For example:- No longer will the federal government own, operate andsubsidize large parts of Canada’s transportation system. It willfocus instead on core policy and regulatory responsibilities andensure the safety and security of the system.- The Program Review will help establish an integrated, "whole-farm" approach to the government’s farm safety net program whichemphasizes income stabilization rather than income support.- The business community has often stated that it does not needor want the level of assistance it receives from the federalgovernment. In the Program Review, subsidies to business will bereduced by 60 per cent over the next three years. Moreimportantly, the remaining assistance will be largely in the formof loans and other repayable contributions. In other areas, there will be fundamental change in how thegovernment delivers programs and services. Many departments willalter the way they deliver services to increase efficiency andimprove services to Canadians. _______________________________________________________________Departmental savings under Program Review[1]________________________________________________________________ 1995-96 1996-97 1997-98[1]________________________________________________________________ (millions of dollars) Natural Resource Sector 328 380 581 Agriculture 215 128 272 Fisheries and Oceans 51 80 110 Natural Resources 26 82 68 Environment 35 90 131Transport 555 953 1,111Industrial, Regional and Scientific- Technological Support Programs 508 476 581 Industry (and specific agencies) 93 148 212 Science and Technology Agencies[2] 71 108 142 Regional Agencies 144 220 227 Infrastructure 200Justice and Legal Programs 32 59 75 Justice 6 12 17 Solicitor General 25 47 58Heritage and Cultural Programs 142 274 387Foreign Affairs and International Assistance 490 515 711 Foreign Affairs/International Trade 109 134 171 International Assistance Envelope 381 3810 540Social Programs 877 1,580 1,771 Citizenship and Immigration 100 69 103 Health 49 138 201 Human Resources Development 600 1,100 1,100 Indian Affairs and Nothern Development 5 97 177 Canada Mortgage and Housing 64 115 128 Veterans Affairs 59 61 62Defence/Emergency Preparedness 350 557 1,033PUITTA [3] 200 276 280General Government Services [4] 232 391 523Parliament/Governor General 3 8 15Expenditure Management System 150 150 150Other Program Review (unallocated) 250 ___________________________________ Total 3,867 5,869 7,217______________________________________________________________ [1] Savings include additional cost-recovery revenues that appearin non-tax revenues. [2] Includes granting councils, the Canadian Space Agency and theNational Research Council. [3] Public Utilities Income Tax Transfer Act. [4] Includes Central Agencies, Public Service Commission,Statistics Canada, National Revenue, Parliament, and Public Worksand Government Services.Numbers may not add due to rounding._______________________________________________________________ Departmental Spending ReductionsDepartmental spending will be cut by $3.9 billion in 1995-96,$5.9 billion in 1996-97 and $7.2 billion in 1997-98 relative towhat would have been the case without Program Review. Theexpenditure reductions reflect government priorities as well asthe scope for program rationalization and efficiencyimprovements.- The largest percentage declines in spending will take place inTransport, Industrial, and Regional support programs, wherespending will fall by about half between 1994-95 and 1997-98.This principally reflects sharp reductions in business subsidies.Spending on science and technology by the science agencies ofIndustry Canada’s portfolio will be reduced by proportionallyless than the average decline in the department’s Industrial,Regional and Scientific-Technological programs, reflecting theimportance of government support for R&D.- Defence spending will also fall sharply, declining by$1.6 billion between 1994-95 and 1997-98. The cuts in defencespending resulting from this budget reflect the 1994 DefenceWhite Paper and are in addition to large reductions announced inlast year’s budget.- Spending levels will be halved in some departments. Thesmallest percentage reductions will occur in departmentsdedicated to social programs, justice and corrections.- In almost all cases the cuts will be on top of planned spendinglevels that were already declining as a result of decisions inthe February 1994 budget. Hence by 1997-98, spending subject tothe Program Review will have declined 18.9 per cent relative to1994-95._______________________________________________________________Federal departmental spending after Program Review[1]_______________________________________________________________ Spending levels Change 1994-95 1997-98 $ millions per cent_______________________________________________________________ (millions of dollars) Natural Resource Sector 4,847 3,333 -1,514 -31.2 Agriculture 2,073 1,628 -445 -21.5 Fisheries and Oceans 775 565 -211 -27.2 Natural Resources 1,262 638 -624 -49.4 Environment 737 503 -234 -31.8Transport 2,851 1,404 -1,447 -50.8Industrial, Regional and Scientific-Technological Support Programs 3,798 2,355 -1,443 -38.0 Industry (and specified agencies) 1,301 742 -560 -43.0 Science and Technology Agencies[2] 1,359 1,038 -321 -23.6 Regional Agencies 1,138 576 -562 -49.4Justice and Legal Programs 3,298 3,132 -166 -5.0 Justice 757 693 -64 -8.4 Solicitor General 2,541 2,439 -102 -4.0Heritage and Cultural Programs 2,897 2,221 -676 -23.3Foreign Affairs and International Assistance 4,082 3,292 -789 -19.3 Foreign Affairs/ International Trade 1,488 1,231 -257 -17.3 International Assistance Envelope 2,594 2,061 -532 -20.5Social Programs 13,003 12,013 -990 -7.6 Citizenship and Immigration 663 601 -62 -9.4 Health 1,815 1,746 -70 -3.8 Human Resources Development 2,544 1,660 -885 -34.8 Indian Affairs and Northern Development 3,761 4,208 447 11.9 Canada Mortgage and Housing 2,131 1,942 -189 -8.9 Veterans Affairs 2,088 1,857 -232 -11.1Defence/Emergency Preparedness 11,574 9,925 -1,648 -14.2PUITTA 250 0 -250 -100.0General Government Services 4,967 4,137 -831 -16.7Parliament/Governor General 309 277 -32 -10.2 ________________________________________ Total 51,875 42,089 -9,785 -18.9 Per cent of GDP 7 5_______________________________________________________________ [1] As noted in Table 4.1, Program Review resulted in additionaldeficit reduction through increases in cost recovery and revenuegeneration. These savings are not reflected in this Table.[2] Includes granting councils, the Canadian Space Agency and theNational Research Council.Numbers may not add due to rounding._______________________________________________________________ SMALLER PUBLIC SERVICE A more focused, effective and frugal government will requirefewer employees to deliver government programs. Accordingly, bythe time that 1995 budget actions are fully implemented, federalemployment is expected to decline by about 45,000 or 14 per cent.Some of the jobs lost in government will be transferred to theprivate sector, including 6,000 positions in Transport Canada.Fair, Well-Managed and Orderly Reductions The government understands the value of employment security toits employees and the quality of the services they deliver toCanadians. In the face of such extraordinary pressure todownsize, the government is obliged to consider extraordinarymeasures. The President of the Treasury Board has announced thespecific measures the government is prepared to take. Thesemeasures will allow departments to manage their reductionseffectively while treating fairly employees who must go and thosewho will stay. These measures include:- Early Retirement Incentive: Surplus employees aged 50 or overwith 10 or more years of employment will be able to retire withan immediate pension based on years of service with no penaltyfor early retirement. The 15-week separation benefit availableunder the Work Force Adjustment Directive (WFAD) to surplusemployees eligible for a continuing pension benefit willbe eliminated for the duration of the early retirement incentive.- Cash-Based Early Departure Incentive: Comparable to private-sector practice, a cash-based early departure incentive programwill be made available for three years to surplus employees indepartments designated by Treasury Board as “most affected”because they are unable to meet their reductions through existingor workforce adjustment mechanisms. The National Defence CivilianReduction Program will be folded into this regime and its benefitstructure will be brought in line on March 31, 1996.- Assistance to Employees: Employee transition services will beaugmented. This includes career counselling and job-searchassistance. Management-labour committees will be established inall regions to identify employment opportunities inside andoutside the Public Service.- Pre-retirement Transition Leave: Amendments to the PublicSector Compensation Act (PSCA) will allow the introduction ofvoluntary measures such as pre-retirement transition leavewithout pay, and permit employees to take off blocks of time andaverage their incomes over the year.- Non-Salary Terms and Conditions of Employment: Amendments tothe PSCA will permit sensible, neutral-cost changes to non-salaryterms and conditions of employment.Work Force Adjustment Directive The WFAD will be changed to facilitate the orderly, cost-effective management of organizational and structural change. Forexample, legislation will modify restrictions on contracting outand the definition of mobility. As well, certain provisions ofthe WFAD will be suspended for three years so that surplusemployees in "most affected" departments who decline thedeparture incentive will cease to be paid after six months andwill be laid off one year after that, unless alternativeemployment is found.Incentive Costs Costs associated with the early departure incentives areestimated at this time to be about $1 billion. Consistent withprivate-sector accounting conventions, these costs will beincluded in the 1994-95 fiscal year as a one-timerestructuring charge.Reducing Business Subsidies Business subsidies frequently fail to achieve their desiredpurpose. As the OECD Jobs Study expressed it: "They tend to slowrather than stimulate adjustment; they discourage rather thanencourage innovation, and they tend to become permanent." As a key element of creating a new role for the federalgovernment in the economy, the actions in the budget willeliminate or substantially reduce departments’ businesssubsidies. Total business subsidies will decline from$3.8 billion in 1994-95 to $1.5 billion by 1997-98. By 1997-98,business subsidies will be 60 per cent lower than 1994-95 levels. The Western Grain Transportation Act (WGTA): To improve graintransportation and more effectively meet our international tradeobligations, the annual $560 million subsidy to the railways willbe eliminated as of August 1, 1995. There will be a transition tomarket-determined freight rates. Measures will be introduced tofacilitate removal of uneconomic branch lines and to changepooling points for Canadian Wheat Board export shipments. A package of transition measures will be provided, including apayment of $1.6 billion to owners of Prairie farm land. A multi-year adjustment package of $300 million will facilitatetransition to a more efficient transportation system. Creditguarantees on up to $1 billion of sales will be provided to non-sovereign buyers of Canadian Wheat Board agri-food products. Atlantic Region Freight Assistance Act (ARFAA) and the MaritimeFreight Rates Act (MFRA): These inefficient subsidies cost $99million per year and will be eliminated July 1, 1995. A $326million transportation adjustment program will be paid over fiveyears for regions currently receiving ARFAA/MFRA subsidies.Transition programs will let provinces target assistance to meetlocal shippers’ adjustment needs and to provide for improvedinfrastructure. Dairy Subsidy: The dairy producer subsidy will be reduced by 30per cent over the next two years. The program’s future will bereviewed in consultation with the industry and the provinces. Agricultural Safety Net: Overall funding for safety netprograms, including the Net Income Stabilization Account, CropInsurance and the Gross Revenue Insurance Program, will bereduced by 30 per cent over the next three years. The remainingfunding will pay for a core national whole-farm stabilizationprogram, crop insurance, and province-specific companionprograms. Feed Freight Assistance: This transportation subsidy will beterminated. Transitional funding will be provided over the nextten years. Consultations on how the transitional funds can bestenhance the competitiveness of affected regions will beundertaken with the provinces and affected industries. Industry Canada: Industry Canada will further reduce remainingbusiness subsidies. Remaining spending will focus on jointprivate/public-sector initiatives in high-growth sectors. Cultural Industries: Subsidies provided to cultural industriesunder the Department of Canadian Heritage will be reduced,including an 8 per cent reduction over three years in the postalsubsidy (which subsidizes the mailing rates of certain Canadianbooks and magazines). Reductions will also result from arestructured book publishing program. Regional Agencies: The agencies will focus on small- and medium-size enterprises, but will provide loans and repayablecontributions rather than direct subsidies. The agencies’ fieldoffices, and those of Industry Canada in Ontario, will provide asingle point of contact to federal government programming forthe small business sector. As well, in an effort to facilitateaccess to capital for small- and medium-size enterprises in theirregion:- The Federal Office of Regional Development -- Quebec willinvestigate the potential of forging new alliances with theFederal Business Development Bank and other financialinstitutions to deliver business assistance more effectively andon more commercial terms.- The Department of Western Economic Diversification will move toeliminate direct financing assistance provided to individualbusinesses on a non-commercial basis. Specialized investmentfunds will be established, in co-operation with private/publicfinancial institutions, to improve small business’ access tocapital. These strategic alliances will pay particular attentionto the issue of access to capital for small firms engaged in the‘new economy’. They will explore new lines of business notcurrently served by commercial institutions, and attempt toincrease the supply of ‘patient’ capital for these firms.- The Atlantic Canada Opportunities Agency will continue to workwith the provinces and the private sector to increase access toinvestment capital through support for the establishment of anew, private-sector-operated Atlantic venture capital fund.PRIVATIZING/COMMERCIALIZING GOVERNMENT OPERATIONSThe government will privatize and/or commercialize governmentoperations where feasible and appropriate. Non-essential equityholdings, assets and services will be considered forprivatization, or placed on a more commercial basis, where it canbe shown to improve service and reduce costs while continuing toprotect the public interest.Reasons to Privatize or CommercializePrivatizing/commercializing operations which government no longerneeds to run represents good management and common sense. Thisapproach will help to reduce financing requirements, debtservicing costs and the deficit. It will also contribute tobetter economic performance through increased efficiency,competition and new private-sector investment.Candidates- Petro-Canada: The government will dispose of its common sharesof Petro-Canada. The timing and proceeds of sale will be subjectto market conditions.- CN: The Minister of Transport will take action to sell CN.Doing so will provide the company with the freedom to makestrategic operating and investment decisions quickly. It willalso enable CN to seek new sources of private-sector capital inorder to fund those decisions. The timing and proceeds of salewill be subject to market conditions.- Transport Canada’s Air Navigation System (ANS): The governmentwill commercialize ANS, which comprises the air traffic controlsystem, flight information system and electronic navigation aids.Terms and conditions of transfer and operating framework will befinalized in late 1995. Transport Canada will also commercializeother current operations, including airports, which will betransferred to local authorities.- Canada Communication Group (CCG): The Minister of Public Worksand Government Services will oversee the full or partialdivestiture of CCG. Formerly the Queen’s Printer, CCG providesprinting, publishing and communications services to federaldepartments on a fee-for-service basis.Other OpportunitiesThe government will seek and undertake other opportunities forprivatization and commercialization. Initiatives which may bepursued include:- The National Capital Commission will operate on a morecommercial basis.- Natural Resources Canada will reorganize its geomaticsactivities and move towards Special Operating Agency status.- Environment Canada will explore alternatives for more efficientdelivery of weather services, including commercialization.- The Department of Agriculture and Agri-Food will shareresponsibilities and streamline arrangements with industry forinspection and regulation activities.- The Department of Fisheries and Oceans (DFO) will seek to enterinto partnerships with the fishing industry and others in themanagement of capacity, licensing and compliance. DFO will alsodivest recreational harbours to municipalities or otherinterested parties and rationalize commercial fishing harbours.- The Canadian Space Agency will focus increasingly on private-sector partnerships and joint ventures for earth observation,space science and technology.- The Department of National Defence will look at enhancing itsprivate-sector partnerships.- The Departments of Health, Agriculture, Fisheries and Oceansand Industry will co-operate, in consultation with the foodindustry and the provinces, to improve the effectiveness and cost-efficiency of the federal component of the Canadian foodinspection system. THE CANADA SOCIAL TRANSFERA New Transfer SystemImproving the effectiveness of the Canadian federation requireschanges to the fiscal relationship between Ottawa and theprovinces. The budget announces a significant reform to thesystem of federal transfers to the provinces and territories --the Canada Social Transfer (CST). Currently, the federal government transfers funds to theprovinces and territories to help them provide social programs toCanadians. Funding for health and post-secondary education isprovided under Established Programs Financing (EPF) while fundingfor social assistance and social services is provided under theCanada Assistance Plan (CAP).How it WorksBeginning in 1996-97, these transfers will be replaced by asingle transfer -- CST. Unlike the current system which is basedpartly on cost-sharing arrangements, CST will be a block fund,like EPF. This means that the amounts transferred will not bedetermined by provincial spending decisions (as under costsharing). The new transfer will be provided through cash paymentsand tax points. The Equalization program, which benefits thelower-income provinces, is untouched and payments will continueto grow, ensuring that all provinces can provide comparablelevels of service at comparable rates of taxation. Equalization,together with the CST, will total over $35 billion in 1996-97(Table 1).Amount of CST TransfersThe provinces will receive $29.7 billion in transfers under theexisting programs for 1995-96, about the same as in 1994-95, toallow for a period of stability before change. Under the CST,funding to provinces will be reduced from what it would otherwisehave been in 1996-97 by $2.5 billion to $26.9 billion. It will befurther reduced from what it would otherwise have been in 1997-98by $4.5 billion to $25.1 billion. While these reductions aresignificant, they are less than cuts to other federal governmentprogram spending. For the first year, 1996-97, CST will be allocated amongprovinces in the same proportion as the 1995-96 total of EPF andCAP transfers which are being replaced (Table 2). This givesprovinces certainty about their allocation for the year so theycan do their fiscal planning. The Minister of Finance will consult with provinces andterritories in developing a permanent method of allocatingpayments among provinces under CST for 1997-98 onward.Giving Governments More FlexibilityThe new transfer will end the intrusiveness of previous cost-sharing arrangements and will reduce long-time irritants:- Provinces will no longer be subject to rules stipulating whichexpenditures are eligible for cost sharing or not.- Provinces will be free to pursue their own innovativeapproaches to social security reform.- The expense of administering cost sharing will be eliminated.- Federal expenditures will no longer be driven by provincialdecisions on how, and to whom, to provide social assistance andsocial services.Safeguarding Standards for CanadiansThe transfer of federal funds to the provinces will safeguardstandards:- The federal government will continue to enforce the principlesof the Canada Health Act.- Provinces must continue to provide social assistance withoutminimum residency requirements. The federal government, under the leadership of the Minister ofHuman Resources Development, will invite all provincialgovernments to work together on developing, through mutualconsent, a set of shared principles and objectives that couldunderlie the new transfer. In this way, all governments couldreaffirm their commitment to the social well-being of Canadians.The Minister of Health will continue to work with provincial andterritorial health ministers to renew Canada’s health system.A New Approach to Federal-Provincial Fiscal RelationsThe Canada Social Transfer represents a new approach to federal-provincial fiscal relations marked by greater flexibility andaccountability for provincial governments, and more sustainablefinancing arrangements for the federal government. It continuesthe evolution towards more mature fiscal relations. _______________________________________________________________ Table 1Major Transfers to Provinces and Territories(Estimated entitlements)_______________________________________________________________ 1994-95 1996-97 Change_______________________________________________________________ (millions of dollars) Newfoundland 1,484 1,512 +28Prince Edward Island 316 323 +7Nova Scotia 1,932 1,949 +17New Brunswick 1,610 1,632 +22Quebec 11,446 11,096 -350Ontario 10,530 9,653 - 877Manitoba 2,039 2,032 -7Saskatchewan 1,411 1,450 +39Alberta 2,525 2,313 -212British Columbia 3,573 3,291 -282Northwest Territories 74 68 -6Yukon 34 32 -2_______________________________________________________________ Total 36,9741 35,3512 -1,623_______________________________________________________________ [1] Comprised of Equalization, EPF and CAP.[2] Canada Social Transfer and Equalization._______________________________________________________________ Table 2The Canada Social Transfer: CST(Estimated Entitlements)_______________________________________________________________ CAP/EPF CST 1994-95 1995-96 1996-97_______________________________________________________________ (millions of dollars) Newfoundland 608 608 551Prince Edward Island 137 137 124Nova Scotia 964 966 875New Brunswick 763 764 692Quebec 8,098 8,141 7,376Ontario 10,530 10,653 9,653Manitoba 1,141 1,143 1,036Saskatchewan 982 981 888Alberta 2,525 2,552 2,313British Columbia 3,573 3,632 3,291Northwest Territories 74 75 68Yukon 34 35 32_______________________________________________________________ Total 29,429 29,686 26,900_______________________________________________________________ PROTECTING ELDERLY BENEFITS Canada’s retirement income system has three main components:- employment-related pension income under the Canada and QuebecPension Plans;- Old Age Security (OAS) and Guaranteed Income Supplement (GIS);and- tax assisted retirement savings: Registered Pension Plans andRegistered Retirement Savings Plans. The 1995 budget begins action to put Canada’s retirement incomesystem on a fairer and sustainable basis.Canada Pension Plan (CPP) CPP pensions are paid entirely by contributions made byemployers and employees, and are based on past earnings. Thisfall, the finance ministers of Canada and the provinces will meetfor their regular five-year review of the financing of the CPP asmandated by law. Their review will be based on the actuarialreport of the CPP recently tabled in Parliament. The report concludes that CPP contribution rates will have torise from 5.4 per cent in 1995 to some 14 per cent in 2030, 1percentage point higher than previously expected. Costs haverisen in the short- and long-term because disability benefitshave been higher than anticipated and contributions havebeen lower as a result of the recent recession.Old Age Security and Guaranteed Income Supplement These benefits today cost over $20 billion, a cost that isestimated to grow by 60 per cent over the next 15 years as thepopulation ages. The government will release a paper later thisyear on the changes required in the public pension system toensure its affordability. The goal is to bring in legislatedchanges to take effect in 1997. The basic principles forreforming OAS and GIS shall be:- undiminished protection for all seniors who are less well off,including those receiving GIS;- a continuation of full indexation of benefits to protectseniors from inflation;- the provision of OAS benefits on the basis of family income, asis currently the case with GIS;- greater progressivity of benefits by income level; and- control of program costs. Consultations with seniors, and Canadians generally, on theprecise nature of the needed changes will occur when the paper isreleased later this year. In the interim, two measures will beimplemented effective July 1996:- OAS payments will be calculated and paid out net of the high-income recovery amounts, based on income reported on the previousyear’s tax return. This measure will not affect the amount ofbenefits provided to seniors. The only change is that the OASbenefit will be reduced before it is sent out rather than beingtaxed back after individuals have received their cheques. Thehigh-income recovery affects only those individuals with incomesabove $53,215.- OAS recipients who are no longer resident in Canada will haveto file a statement of their world-wide income in order tocontinue to receive OAS benefits. Currently, non-residents withincomes above $53,215 escape the high-income recovery. They aretreated more favourably than residents of Canada.Tax-Assisted Retirement Savings The budget proposes actions on the third part of the retirementincome system -- tax-assisted retirement savings. Details of theseactions can be found in the fact sheet, Tax-Assisted RetirementSavings, elsewhere in this booklet. TAX ASSISTANCE FOR RETIREMENT SAVINGS The government provides tax assistance for retirement savingsby allowing contributions to pension plans to be deducted fromincome in computing tax. The return on savings in the plans isnot taxed each year. Tax is paid when income is received from theplans. Registered Pension Plans (RPPs) are pension plans for employeessponsored by employers or unions and funded through contributionsby employees and employers. Defined-benefit RPPs provide apension that is generally calculated on the basis of earnings andyears of service. Money-purchase plans provide whatever pensionincome the accumulated contributions and return on investment inthe RPP will buy at retirement. Registered Retirement Savings Plans (RRSPs) are savings plansfor individuals and the self-employed that provide retirementincome based on what the accumulated contributions and return oninvestment in the plan will buy at retirement. RRSP contributorsmay also belong to an RPP.The 1995 Budget:- reduces the contribution limits for RRSPs and money-purchaseRPPs which will produce fiscal savings while affecting onlyindividuals earning over $75,000;- lowers the $8,000 allowance for overcontributions to RRSPswhich will substantially eliminate an opportunity for unintendedtax deferrals; and- phases out the tax-free rollover of retiring allowances toRRSPs, a measure which is no longer needed under the reformedsystem of pension and RRSP limits.Reduction in Pension and RRSP Contribution Limits The reductions in pension and RRSP limits will not compromisethe integrity and effectiveness of the private retirement savingsystem. The measures will adjust the limits to a level where fulltax assistance is provided on earnings up to about 2.5 times theaverage wage, the target set under pension reform. The specificchanges are:- The dollar limit on deductible RRSP contributions will bereduced to $13,500 for 1996 and 1997 and then increased by $1,000a year to reach $15,500 in 1999.- The dollar limit on contributions to money-purchase pensionplans will also be reduced to $13,500 in 1996. It will then beincreased by $1,000 a year to $15,500 in 1998.- The dollar limit on Deferred Profit Sharing Plan (DPSP)contributions will continue to be one-half the limit for RPPs.- The current maximum pension limit for defined-benefit RPPs willbe frozen through 1998. The pension and DPSP limits will beindexed beginning in 1999, and the RRSP limit in 2000.- The government will consider modifying the RRSP limits, withoutincurring additional revenue costs, to restore lost RRSP room toemployees who leave pension plans before retirement.RRSP Overcontribution Allowance- A penalty tax of 1 per cent applies to excess RRSPcontributions above a margin of $8,000. Beginning in 1996, thisovercontribution allowance will be reduced from $8,000 to $2,000.This will be phased-in to allow existing excess contributions tobe retained until they can be deducted against new RRSP room,rather than forcing them to be withdrawn.Retiring Allowance Rollovers- The tax provisions that allow individuals to transfer to anRRSP up to $2,000 per year of service out of a retiring allowancewill be phased out by reducing the limit to zero for years ofservice after 1995.- Individuals may continue to transfer up to $2,000 per year ofservice before 1996, plus $1,500 for each year before 1989 inwhich they earned no pension or DPSP benefits.Pay Out of Locked-In RRSPs- Holders of RRSPs that are locked in under a provision of thePension Benefits Standards Act will be allowed to purchase LifeIncome Funds, a more flexible way of managing retirement incomefunds. They can now only purchase life annuities with thesefunds.ELIMINATING DEFERRAL OF TAX ON BUSINESS INCOMEAmong a number of measures proposed in the budget to improve thefairness of the tax system is an important change affectingindividuals who report business income (including professionalincome). To eliminate the deferral of taxes, these taxpayers willbe required to report their business income on a calendar yearbasis, effective for taxation years starting after 1994. The measure affects all sole proprietorships, professionalcorporations and partnerships (where at least one member of thepartnership is an individual, professional corporation, oranother affected partnership).How Taxes Are Currently DeferredCurrently, business income is reported by an individual on thebasis of a business’ fiscal period. That fiscal period may ormay not coincide with the end of the calendar year (December 31),which is the end of the annual reporting period for employmentand other types of income. In calculating income for a calendar year, an individual mustinclude income from any business with a fiscal period ending inthat year. Therefore, if the business’ fiscal period ends priorto December 31, the reporting of business income earned betweenthe end of that fiscal period and December 31 can be delayed. Asa result of the delay in reporting the business income, thepayment of taxes on that income can be deferred.Transitional ReliefGiven that most affected taxpayers would otherwise be required toreport more than 12 months of business income in their 1995 taxreturns, the measure includes provisions to bring the additionalamounts into income over a 10-year transitional period, subjectto some restrictions. The measure allows for 5 per cent of theadditional income to be included in 1995, 10 per cent to beincluded in each of the subsequent eight years and 15 per cent tobe included in the last year.Extended Reporting PeriodSince some individuals will now have less time to prepare theirfinancial statements and income tax returns, individuals (otherthan trusts) with business income (other than only from limitedpartnerships) will be given until June 15 of each year tocomplete and file their income tax returns. However, any taxowing will continue to be payable on April 30 and interest onunpaid taxes will be charged from that date.Changed Year-End for GSTPersons required to have a December 31 fiscal year-end and whoare GST registrants will have the same year-end for GST purposes.For individuals who file annually for GST purposes, the GSTfiling period will also be extended to June 15 but, as withincome taxes, any GST owing will continue to be due on April 30.Revenue Canada will provide further details regarding changes toreporting periods for GST purposes.Illustration of Transitional ProvisionConsider an individual with the following characteristics:- the individual’s unincorporated business earns $120,000 in eachfiscal period; and- the business has a January 31 year-end (i.e. the reporting of11 months of income is deferred one year). Income of $110,000, earned between February 1, 1995 andDecember 31, 1995 is currently deferred for tax purposes._______________________________________________________________Calculation of Business Income for Tax Purposes_______________________________________________________________ 1995 1996_______________________________________________________________ Business income- fiscal period ended Jan. 31/95 $120,000- fiscal period ended Dec. 31/96 $120,000Inclusion of income that otherwise would have been deferred for tax purposes:- income earned Feb. 1/95 - Dec. 31/95 - $110,000 (A)- annual inclusion percentage (B) 5% 10%- additional income to be taxed (A x B) $5,500 $11,000 ------------------------ Income from business to be reported $125,500 $131,000 _______________________________________________________________ Further details on this measure can be found in Annex 6 of theBudget Plan.