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Archived - Chapter 2
Focusing Government

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Less Debt, Lower Taxes and More Effective Government

Canadians want their governments to be fiscally prudent and to deliver results. Focusing government is about reducing debt, lowering taxes, efficient spending, low, stable and predictable inflation, restoring fiscal balance and making the economic union more competitive and efficient. This strong financial foundation is essential to the achievement of the other elements of this plan.

Canada's Fiscal Advantage

Eliminating Total Government Net Debt

High levels of government debt hurt Canadians. Interest paid on debt is not available for more productive uses. That's why a key part of Advantage Canada is to work toward the elimination of Canada's total government net debt in less than a generation.

Canada's New Government believes that a low public debt is essential to our long-term prosperity. Reducing debt:

  • Frees up funds currently absorbed by interest costs to reduce taxes or to invest in other priorities, such as health care, public services and national security (see box below).
  • Promotes economic stability by helping keep interest rates low, allowing Canadians to borrow money for things that matter-such as new equipment and information technology for businesses, or education and home renovations for families.
  • Strengthens our country's ability to deal with economic shocks and challenges such as the aging of the population.

Debt reduction is about fairness and equity toward future generations of Canadians. Debt represents a tax on future generations. It is only fair that those who benefited from the run-up in the debt assume responsibility for bringing it down. To do otherwise is to mortgage the future of our children and grandchildren.

The full impact of public debt on the economy includes not only the federal government's debt, but also debt of provincial-territorial and local governments, and the assets of the Canada Pension Plan and Quebec Pension Plan. That is why a standard measure of debt used by organizations such as the OECD is total government net debt. (The annex of The Economic and Fiscal Update contains more details on the various measures of debt.)

In Canada's case, all orders of government have made considerable fiscal progress in recent years. As measured by the OECD, Canada has moved from having the second highest net debt-to-GDP ratio among the G7 countries to the lowest today.

Benefits of Reducing Public Debt
Revenues Devoted to Debt Charges (2005-06)

Benefits of Reducing Public Debt - Revenues Devoted to Debt Charges (2005-06)
  • Federal and provincial governments currently devote a significant share of their revenues to pay interest charges on their public debt.
  • At the federal level, debt charges absorb $34 billion a year, or 15 cents of every revenue dollar. That is more than the federal government spends on national defence, employment insurance benefits and international assistance combined.
  • At the provincial-territorial level, a somewhat smaller share of revenues is absorbed by debt charges ($21 billion, or 9 cents of every revenue dollar).
  • The growing assets of the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) will ensure public pensions are secure and affordable for generations to come.
  • Reducing Canada's debt will allow governments to lower the tax burden on Canadians and to devote more resources to priorities, such as health care, education, the environment and national security.

Canada's New Government believes that we now have the opportunity to turn our strong fiscal performance into a fiscal advantage for Canada and to ensure that the legacy we leave for our children and grandchildren is one of opportunity and choice.

The Government believes that all governments should aim to eliminate Canada's total government net debt in less than a generation. We can achieve this goal by 2021 if provincial-territorial governments maintain balanced budgets and the CPP/QPP continue to build assets as currently projected. For its part, Canada's New Government will continue to plan for an annual debt reduction of $3 billion. Any surpluses recorded by provincial-territorial governments and federal surpluses in excess of $3 billion will contribute to accelerate the elimination of Canada's total government net debt.

Eliminating Canada's total government net debt will require the concerted action of federal, provincial-territorial and local governments as well as the continued diligent management of the CPP and QPP. By doing so, Canada will be able to count itself among the very few countries that are in a net asset position.

Canada's Fiscal Advantage

Eliminating Canada's Total Government Net Debt in Less Than a Generation

All orders of government have made considerable fiscal progress in recent years, and we now have the opportunity to turn our strong fiscal performance into a fiscal advantage for Canada. This will ensure that the legacy we leave for our children and grandchildren is one of opportunity and choice.

Advantage Canada

proposes to eliminate Canada's total government net debt in less than a generation.

Chart 2.1 - Eliminating Canada's Total Government Net Debt

The federal government will do its part by continuing to plan on annual debt reduction of $3 billion. Further, it is advancing its commitment to reduce the federal debt-to-GDP ratio to 25 per cent by one year, to 2012-13, from 35 per cent today. This will bring the federal debt burden to its lowest level since the late 1970s and will further the objective of reducing Canada's total government net debt to zero by 2021.

Eliminating Canada's total government net debt will mean that fewer dollars will be spent on interest costs. It will mean that more money will remain in people's pockets so they can spend it or save it as they see fit.

Policy Commitment

Canada's New Government believes that we should aim as a country to eliminate Canada's total government net debt by 2021 at the latest.

The federal government will show leadership by continuing to plan on annual debt reduction of $3 billion.

The federal government is also advancing its commitment to reduce the federal debt-to-GDP ratio to 25 per cent by one year, to 2012-13. This will bring the federal debt burden to its lowest level since the late 1970s.

Directing Interest Savings to Personal Income Tax Reductions

Canadians pay too much tax. High tax rates create a disincentive for people to work and achieve their full potential, and prevent Canada from retaining and attracting the highly skilled people we need.

Advantage Canada

's commitment to reduce Canada's federal debt will reduce the amount of interest the Government needs to pay. These lower interest costs will provide the opportunity to lower personal income taxes.

The $13.2-billion debt reduction in 2005-06 will result in ongoing interest savings of $660 million per year. Combined with interest savings from the planned $3-billion annual debt reduction, this will create room for personal income tax reductions of about $800 million in 2007-08, rising to $1.4 billion per year by 2011-12. To the extent that the Government realizes unanticipated surpluses, these will be used to accelerate the reduction of the debt and create further room for personal income tax reductions.

Lower personal income taxes will offer people greater incentives to work, save and invest in Canada-thereby benefiting families by increasing their standard of living and quality of life.

Policy Commitment

To ensure that Canadians benefit directly from reductions in the federal debt, the Government will dedicate the effective interest savings from debt reduction each year to personal income tax reductions.

To the extent that the Government realizes unanticipated surpluses, it will accelerate debt and personal income tax reductions.

Dedicating Interest Savings From Debt Reduction to Personal Income Tax Reduction

Canada's Tax Advantage

Reducing Taxes for All Canadians and Establishing the Lowest Tax Rate on New Business Investment in the G7

Low taxes result in stronger economies, and Canada's taxes are not low. The level of personal and business taxation we are burdened with in Canada is not good for families, it is not good for businesses, and it is not good for the long-term national interest. That's why lowering taxes is so central to Advantage Canada.

To create a Canadian tax advantage over the coming years, Canada's New Government will:

  • Deliver on its commitment to reduce the GST to 5 per cent.
  • Help low-income Canadians over the welfare wall by implementing a Working Income Tax Benefit.
  • Continue to reduce personal income taxes to make the tax system fairer and to attract and retain highly skilled workers, who are key to Canada's future economic competitiveness.
  • Reduce taxes on savings, including capital gains, to make them more competitive with the tax treatment of savings in other countries.
  • Establish a broader corporate tax advantage for Canada in the treatment of business investment. Step one is to create a meaningful tax advantage over the United States, our closest economic partner. Step two is to achieve the lowest tax rate on new business investment in G7 countries.

The Canadian tax advantage will help individuals, families and businesses to get ahead. It will reward initiative and make Canada the investment destination of choice. And the results delivered from these lower taxes will be amplified by actions that will reduce unnecessary regulation and create a stronger business climate for Canada.

Containing the Growth of Spending

The commitment to reduce Canada's debt burden reflects the Government's ongoing commitment to control spending. Focused spending will help lower the debt, reduce Canada's tax burden and redirect funds towards other important priorities. Reducing waste and unnecessary spending is a never-ending job: it is always the right thing to do. That's why Canada's New Government delivered over $1 billion of ongoing savings this year and next at the same time as it achieved a substantial budgetary surplus in 2005-06.

Also, the 2006 Economic and Fiscal Update projects that program spending in 2006-07 will come in $1.2 billion lower than anticipated in Budget 2006.

Canada's New Government is committed to keep the rate of growth of program spending, on average, below the rate of growth of the economy. The Government took an important step in meeting this objective in 2005-06, when program spending fell for the first time in nine years. In some years, the growth rate in program spending may exceed the growth rate of the economy, for example because economic growth is lower than expected or because unforeseen factors require a temporary increase in spending. But in general, and as a matter of principle, the Government's approach to fiscal planning will limit the rate of growth of program spending, on average, to below the rate of growth of the economy.

Policy Commitment

Canada's New Government is committed to keeping the rate of growth of program spending, on average, below the rate of growth of the economy.

More Effective, Results-Oriented Government

Keeping the growth rate of program spending below the growth rate of the economy will require focus and discipline. Budget 2006 announced that the Government would develop a new approach to managing overall spending to ensure that all government programs:

  • Are effective and efficient.
  • Are focused on results.
  • Provide value for taxpayers' money.
  • Are aligned with the Government's priorities and responsibilities.

Successful businesses and organizations are following precisely these kinds of principles in order to achieve their goals as effectively as possible. Modern comptrollership and efficiency tools should also be used within government to provide taxpayers with the best possible value for their money.

Policy Commitment

The President of the Treasury Board will outline the Government's new Expenditure Management System, which will focus on good management and value for money. Under the new system:

  • Departments and agencies will manage their programs to clearly defined results, and assess their performance against those results.
  • The Treasury Board Secretariat will oversee the quality of these assessments and ensure that departments explicitly address risk as well as cost-effectiveness.
  • Building on these assessments, Cabinet will systematically review the funding and relevance of all program spending to ensure that spending is aligned with Canadians' priorities and effectively and efficiently delivers on the Government's responsibilities.
  • Cabinet will undertake a rigorous examination of all new spending proposals, taking explicit account of the funding, performance and resource requirements of existing programs in related areas.

The new Expenditure Management System will make responsible spending the norm for how the Government does business, approving only the funding that is actually needed to deliver measurable and effective results, and provide value for money on behalf of Canadians.

In restoring fiscal balance, Canada's New Government is committed to limiting the use of the federal spending power and focusing new spending in areas of federal responsibility.

Policy Commitment

Canada's New Government will limit the use of the federal spending power and focus new spending on areas of federal responsibility.

Maintaining Low Inflation

Since the early 1990s, the policy of low, stable and predictable inflation has served Canadians very well. By helping to keep interest rates low, it has allowed households and businesses to make better long-range plans, and it has provided the required flexibility to adjust to domestic and external shocks.

In 1991, the Government and the Bank of Canada jointly agreed that the Bank should target inflation, first with the goal of reducing it from high levels to progressively lower levels and then-once a low level of inflation was achieved-to keep it low. The current 1 to 3 per cent band with a 2 per cent mid-point target has been in place since the beginning of 1996.

Canada's current 2 per cent target has served the country very well. Inflation has declined significantly since the regime was introduced. Annual Consumer Price Index inflation, which averaged 6 per cent in the 10-year period preceding the establishment of inflation targeting in 1991, has averaged about 2 per cent since then.

Policy Commitment

To maintain low inflation, the Government and the Bank of Canada have agreed to renew the inflation-control target for a period of five years to the end of 2011. Under the renewed agreement, the inflation target will continue to be the 2 per cent mid-point of the 1 to 3 per cent inflation-control range.

Restoring Fiscal Balance

Restoring fiscal balance is founded on the respect for the roles and responsibilities of each order of government. It is inspired by the idea of open federalism, where governments work together in the national interest, and seek to build a stronger economy and better quality of life for Canadians.

Federal, provincial, territorial and municipal governments working together have created a network of programs covering a range of economic and social policies that improve the quality of life of Canadians and enhance the economic performance of the country. Effective fiscal arrangements underpin the relationships between governments and support the achievement of shared priorities in areas such as health, post-secondary education, training, social services and infrastructure.

The September 2004 federal-provincial health care agreement, known as the 10-Year Plan to Strengthen Health Care, provides long-term predictable federal funding for health care with a legislated annual escalator of 6 per cent to 2013-14.

While fiscal circumstances have improved for all governments in recent years, concerns have arisen about the fiscal balance between governments-particularly about the stability of fiscal arrangements other than health care and about a lack of clarity in the roles and responsibilities of each order of government.

In response, Budget 2006 set out in detail the Government's commitments to restore fiscal balance in Canada based on five principles:

  • Accountability through clarity of roles and responsibilities.
  • Fiscal responsibility and budget transparency.
  • Predictable, long-term fiscal arrangements.
  • A competitive and efficient economic union.
  • Effective collaborative management of the federation.

Important initial steps were taken in Budget 2006, including major tax reductions, significant new investments in areas of core federal responsibility, and a commitment to provide an additional $3.3 billion to provinces and territories for shared priorities.

Canada's New Government also committed in the budget to bringing forward additional proposals to restore fiscal balance after consultations with provinces, territories and individual Canadians. These include proposals on renewed and strengthened Equalization and Territorial Formula Financing programs. They will also include a new approach to long-term predictable funding for post-secondary education and training, and infrastructure. The Government also set out to work with provinces to strengthen the economic union and, most importantly, committed to ongoing tax reductions.

The Government has since followed through on its commitment to consult on restoring fiscal balance. The key message the Government has heard is that Canadians support a system of fiscal arrangements that funds national priorities and redistributes wealth from the more prosperous regions to the less prosperous ones-but that these arrangements must be founded on principles of fairness and predictability.

The fiscal balance strategy will follow that principle-based approach and also ensure that no Equalization-receiving province ends up with a fiscal capacity higher than that of a non-Equalization-receiving province. The strategy will also follow the principle that direct transfers to governments other than Equalization should be based on the principle of providing equal support for all Canadians.

Policy Commitment

Canada's New Government is committed to restoring fiscal balance. The result will be a principle-based transfer system, with a clearer delineation of responsibilities among different orders of government, and with greater overall efficiency for governments and enhanced accountability for citizens.

To this end, the Government is committed to:

  • Limiting the use of the federal spending power.
  • Establishing principle-based programs for Equalization and Territorial Formula Financing to ensure all provinces and territories can provide reasonably comparable economic and social programs and services.
  • Introducing long-term predictable funding for infrastructure and post-secondary education and training.
  • Addressing concerns associated with unplanned surpluses by dedicating all interest savings from debt reduction to reducing personal income taxes.
  • Strengthening the economic union by working with provinces and territories to enhance internal trade and labour mobility and create a common securities regulator, and by encouraging the provinces to move ahead with the harmonization of sales taxes with the GST.

A Stronger Economic Union

A major objective of restoring fiscal balance is to ensure that all governments can work together to strengthen the Canadian economic union. Progress on restoring fiscal balance and strengthening the economic union goes hand-in-hand. A strong and efficient economic union ensures that all Canadians get the most from their skills and knowledge, and that businesses and organizations in Canada can invest to obtain the greatest returns. The development of a strong and competitive internal market is necessary for Canada to be successful in the global economy. For example, businesses operating across Canada could realize cost savings and expanded markets if regulatory differences across provinces were eliminated. Similarly, individuals could more easily take a job in another part of Canada if their qualifications were recognized nationally.

All governments within Canada have a responsibility to allow our internal market to operate as freely as possible. In that regard, encouraging progress has been made recently. The governments of Alberta and British Columbia have signed a comprehensive agreement that could significantly enhance the movement of goods, services and capital between these two provinces. This agreement is the broadest interprovincial trade agreement negotiated to date, applying to a range of government policies that affect trade, investment and labour mobility. Also, in September 2006, all provinces reached agreement on an ambitious action plan to reduce interprovincial barriers to trade and labour mobility.

The momentum gained through these agreements is vital for the economic health of the Canadian economy, particularly considering the impending labour market realities of an aging population and acute labour shortages in some regions of the country. Continued progress by provinces and territories in reducing these barriers will build a stronger economy and benefit all Canadians.

Policy Commitment

The Government intends to foster a stronger Canadian economic union by continuing to engage with the provinces and territories to enhance internal trade and labour mobility and create a common securities regulator, and by encouraging the provinces to move ahead with the harmonization of sales taxes with the GST.

 
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