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Federal Budget 2012

For all the tough talk about taming public expenditures, this is a mild budget. This year the Harper Government will be spending $34 billion more than it did before the recession. In 5 years time when the deficit is scheduled to be eliminated, they are planning to spend close to $54 billion more than their pre-recession budget.

Those who thought the election of a Conservative Government would lead to a Conservative budget will be disappointed. There is pruning but no slash and burn. A few small programs have been cut and more will drop as the departmental cuts take hold. But, this does not represent any roll back of the modern state which shows remarkable resilience and remains quite intact under the Harper Government.

The cuts of department expenditures will average about 6.9% across the board. The departments which are taking the biggest hits (9% or more) are: Agriculture & Agri-food, finance, Natural Resources, Privy Council Office, CIDA, Public Safety, Public Service Commission, Public Works & Government Services Canada, Shared Services, Transport Canada, and Treasury Board. The departments that fared the best are Aboriginal Affairs & Northern Development (2.7%) and Veterans Affairs (1.1%).

It is worth noting that Messers Harper, Flaherty and Clement led from the front as their departments were among those taking the largest haircuts.

Are the numbers credible? The budget is based on a consensus of private forecasts with a slight discount factor on the revenue side. So it will be as reliable as the private forecasters turn out to be. It does rely on a steady increase in revenues and could be derailed by a major global downturn. Because the cuts are so modest, the government has not provided a great deal of leeway to hit its numbers if there is any significant down-turn. It also places the saving emphasis on ‘back office’ reforms that may fail to materialize. We will not know until 2014-2015 whether the government is likely to reach its deficit-free target.

At 498 pages, this is Finance Minister Flaherty’s longest budget. It is chock-a-block full of measures – some big and many of them small. Many of these measures have nothing directly to do with the Budget process and reflect other Government priorities. While all governments use the budget bill to slip in other items, the sheer volume of inserts in this budget has become controversial.

While previous Conservative budgets were focused on measures designed to appeal to certain segments of the population to win their support, this budget is more about governing. The Government is seeking to address a series of issues around resources extraction, R & D and immigration. Most of this is focused on the long term creation of jobs, either by providing some incentives to hire more people or removing barriers that get in the way of hiring skilled immigrants. So the Government can legitimately claim this budget is about jobs and growth.

The political Achilles heel of this budget is likely to be the shift in the Old Age Security Pensions from 65 to 67. The Government has a good case to make but they have done a poor job of preparing Canadians for the issue. The vague commitment to reduce Parliamentary pensions when they are much firmer with their intention vis a vis public servants might also become an issue.

The Public Services is not a very happy place to work these days and this budget will not lighten the mood. Between the job losses and the need to contribute more to their own pensions, we can expect management-labour conflict to be an on-going feature for the next several years. Additionally, the way in which this is being done hurts morale. A large number of public servants will not know if they will keep or lose their jobs and this uncertainly is likely to continue for the next several months – if not longer. If you want a more cost-effective and efficient government, demoralizing your employees is not helpful!

In examining this budget, we see the long term impact of the financial recession of 2008. Prior to 2008 the Federal Government’s accumulated debt was declining each year. That reversed during the recession and it will be $152 billion higher 8 years later when the Government projects we are out of deficit. At that point our accumulated debt will be $610 billion. The significance of the national debt is not easy to grasp but imagine a family that has been steadily paying down its mortgage for several years and then goes through a 7 year period when the mortgage payments spike and, at the end of that period, an additional seven years has been added on to the repayment term of their mortgage. We go into the hole so quickly and it takes so long to get out.

The provinces may complain about this budget but they escape relatively unscratched. Transfers have not been cut unless you call the planned reduction from 6% on health transfers to a still generous 4% five years from now. They will be affected by the move in the OAS from 65 to 67 in a decade and half but the budget puts the offer of compensation on the table.

This budget was pre-advertised as the signature statement of the first Harper Majority Government. However, one is struck how indebted Mr. Flaherty has been to the previous Chretien-Martin budgets. The Harper Government stimulus program was the Chretien Infrastructure program on steroids. And in this budget, incrementalism is the order of the day. All the emphasis on trade expansion, skills training, immigrant certification, innovation, research and targeted university funding is following the Martin budget template on where the money should go. This may reflect that government changes political parties more than political parties change government. It also suggests that when you are seeking certain outcomes, governments have a limited number of options in their tool chest that can be brought out.

It is hard to believe this budget will remain a topic in the news cycle for long. It provides the illusion of austerity without the actual pain of it for most Canadians (apart from the public service). The public is likely to accept it and move on.

Business Implications:

  • The resources extraction industries win if the Government delivers on its commitment for accelerated reviews with fixed timetables.

  • The Government has renewed its commitment to free trade agreements. It wants to wind up the EU Agreement and the US –Canada Perimetre Process and then focus on Asia and Latin America. Affected companies will need to ensure their positions are well understood.

  • Foreign investment restrictions for certain telecommunications will be eliminated.

  • The Venture Capital industry has been promised a $400 million injection in direct funding. Few details are offered. One hopes Government policy-makers have read and taken to heart the recently released Boulevard of Broken Dreams by Harvard Business School Professor, Josh Lerner. Professor Lerner details all the ways Government around the world have tried to spur entrepreneurial activity over the last several decades with very limited success. He also covers Canada Governments previous unsuccessful experience with Working Ventures Canadian Fund.

  • The Department of National Defence is taking a 7.4% cut over three years. It is a little difficult to predict at this stage which capital projects will be delayed. The operational tempo has already eased due to the drawdown in Afghanistan and DND capital projects are already subject to chronic delays. Ultimately some large capital project s will have to be delayed or dropped.

  • As government tries to pare it back office costs and consolidate multiple functions, there will be opportunities for companies who can show government how to achieve operational savings. Federal assets are still being reviewed and some divestitures are certainly possible. We also may see more activity on the 3P front.





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