Gems from the 2012 Budget

By Robert Presser on May 18, 2012

So far, Canadians are an easy lot to distract.  The big budget lead item was the gradual increase in the age of eligibility for Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) from 65 to 67 by 2023.  The provinces accused the federal government of downloading since their governments will step in to support those seniors who cannot afford to lose the extra two years of federal payments. Ageing baby-boomers were upset by the change, since most had taken retirement support at 65 as an unchangeable right regardless of the fiscal ability of the government to support it.

piggy_bank.jpgAfter the OAS/GIS headliner, what came next?  One of the top items covered by the mainstream news media was the government’s intention to discontinue issuing pennies and to round transactions up or down to the nearest five cents to compensate.  This was a simpler issue to fixate on than the changes to the environmental review process for new resource projects or stricter rules governing the expense reporting of certain types of charitable organizations.  The pre-budget rumors of spending cuts similar to those of Paul Martin’s 1995 budget fizzled to $5 billion in cuts over three years to the discretionary $80 billion in federal spending.  For those expecting a more conservative budget, they were certainly disappointed, while there is quiet relief among more progressive Canadians who were probably expecting much more of a right-wing realignment of priorities.  Finance Minister Jim Flaherty said so himself, indicating that he must have done a good job if both the left and the right are expressing disappointment.

There are a few nuggets in the budget, however, that deserve closer scrutiny by the public.  Their effects will only become clear over time and so far the coverage they are getting is not on par with their importance.  What follows is an analysis of three of these “sleeper” initiatives.

The changes to the declaration limits for the 24 and 48 hour trips outside the country is going to have a massive long-term effect on the Canadian retail market, and the media is not giving them the coverage they are due.  Seventy percent of Canadians live within an hour’s drive from the US border and if a family of four makes a weekend trip south they can bring back $800 each, which means $3200 for the entire car.  Now, $800 per person means that they can bring back big-ticket items like a stove, dishwasher, bed, flat screen TV or a myriad of other items that were previously out of reach for weekend shoppers.  If a family of four is planning to furnish a new home, there is no limit to the number of $3200 trips they can make in order to save thousands of dollars over shopping in Canada.  Remember that even if pricing is roughly equivalent with the Canadian and US Dollars at par, they immediately save the tax, which is 15% if you are a Quebec resident.

The effect of these changes will be devastating for large and small Canadian retailers alike.  Target has just announced plans to roll out stores across Canada.  If there is a Target within 20 minutes of a Canadian border crossing, why bother?  Canadian buyers now have an incredible incentive to continue to frequent the US locations for the lower USD pricing as well as the tax savings.  Even with the 24-hour exemption increase to $200 per person, the same family can make a simple overnight trip and stock up on smaller items for their combined $800 declaration.  If they can find a Motel 6 or Best Western for $59.00 per night and hold their dinner to $40.00 at Friendly’s, the cost for their mini-vacation is still less than the Canadian tax on $800 of purchases.  There are US retail taxes, of course, but consumers can do the paperwork to claim them back on larger purchases and even if they absorb those taxes they are at roughly half of Canadian levels.  Big-box retailers who were eyeing expansion in Canada are probably freezing or scaling back those plans until changes in Canadian cross border shopping behavior becomes clear.

The federal government has argued that is has merely harmonized the Canadian rules with those that US citizens enjoy when they return home.  This may be true, but Canadian retailers still lack the economies of scale of their US cousins and certain duties still exist on goods not covered by free-trade agreements.  Even Wal-Mart does not offer its Canadian customers the pricing levels enjoyed by US consumers on many of their goods – just ask the Montreal shoppers who continue to patronize the Plattsburg Wal-Mart location.

The new rules come into effect on June 1st, just in time for the summer holiday driving season.  Expect two immediate developments: first, the Canadian Retail Council will fire its lobbyists in Ottawa since they have failed miserably to defend their interests, and two, the Canadian Border Services Agency will lobby the government for more agents to deal with the crush of new shoppers coming home with overloaded vehicles.  The government said that these changes would streamline operations at the border – the reality will be anything but.

A second pick for a closer review is the $300 million dedicated for investment in water treatment facilities at First Nation’s reserves. The program has the potential for abuse and scandal way beyond the sum of money involved.  The government is feeling sensitive over the living conditions on reserves and has taken a page from the third-world development model and decided that providing clean water would be great place to start improving the situation.  The governance structure for managing these investments will be critical to both getting real value for money as well as avoiding political disaster.  The temptation for contractors without water or wastewater experience but currently working for band councils to rebrand themselves as experts will be enormous.  If large international contractors like Suez, Veolia or even our own SNC Lavalin want to get in on the bidding, the incentive to court the reserve politicians with favours will be significant.  The Department of Indian and Northern Affairs may want to run the program itself with the assistance of the Department of Public Works, but native politicians will probably reject the interference.  The key question will be who gets to spend the money, and who will provide oversight. Previous programs aimed at improving the living conditions of Canada’s native peoples have turned out badly and this one has the potential to fail to deliver on its objective and ruin a few political careers in the process.

Finally, the government’s plan to refund $130 million to immigration applicants who filed before 2008 and re-focus the immigration process on skill profiling is going to revolutionize the Canadian workforce. Immigration and Citizenship Canada is being mandated to “clean house” and start spending its time on identifying and processing foreign workers who have the skills Canada really needs.  Employers will also be allowed to cherry-pick workers abroad and fast track them for approval to come to Canada.  The government will also end the farce of enabling the use of short-term foreign workers for seasonal work in areas of high unemployment.  To further reduce chronic regional unemployment, workers will be given incentives to leave where they are and go to areas that actually have jobs!  For Canada, this is radical stuff.

Economists have often lamented that Canada’s official unemployment figures masked major regional disparities in the unemployment rate and did little to highlight skills shortages in key areas of economic development, like the resource sector.  In one budget, the government is proposing concrete measures to address these long-term problems simultaneously.  It will cost very little, and has the potential to reduce our unemployment rate, unlock productivity gains to match our US neighbors, and bring a whole wave of talented people to our country.  Ten years from now we will be toasting this initiative yet we are treating it as an asterisk today.

Go back and read the coverage from the day after the budget now that you have considered these three initiatives.  In retrospect, did the penny really deserve so much attention?  As I said, Canadians are easily distracted from the more substantive issues at hand.



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