January 28, 2009

Budget Hype

We can all hope that national economies throughout the world will turn around by this time next year, because there isn't much in the Harper budget to lead Canada out of the recession. You wouldn't think that based on headlines that scream about billions in deficits over the next five years, but when you look at the budget details you have to ask whether there is anything that will make a difference. Start by taking a close look at the tax cuts.

The personal income tax deduction and tax brackets are indexed. Without the changes announced in the budget, the personal income tax deduction would have increased from $9,600 in 2008 to $10,100 in 2009; the budget changed that to $10,320. Without the budget, the bottom tax bracket in 2008 was 15% on income to $37,885, increasing in 2009 to $38,832; the budget changed that to $40,726. Without the budget, the second tax bracket in 2008 was 22% on income between the first bracket and $75,769, increasing in 2009 to $77,664; the budget changed that to $81,452.

So the budget only increased the basic personal exemption by $220, saving taxpayers $33 a year and having no impact for those whose taxable incomes are under $10,100 (20% of those who filed tax returns for the 2006 tax year had incomes under $10,000). The impact on those in the first tax bracket was to move $947 of income before the tax rate increased from 15% to 22%; so for those fully affected by the change, that's a tax savings of $66. Only 32% of those who filed tax returns for 2006 had incomes over $40,000, so the savings from change s in the second tax bracket aren't something most Canadians will have to think about. Furthermore, the people who save a further $151 by taking advantage of the lower tax on the difference between $77,664 and $81,452 in income aren't necessarily going to spend it on anything that will stimulate the Canadian economy.

In the United States, President Obama is meeting with partisan resistance in getting approval for his economic rescue package. One issue in the debate is how long it will take for any stimulus to be applied. Estimates vary from 75% of the money being spent in 18 months to just 64% by the end of 2010. Keep in mind that any multiplier effect resulting from people spending money they earn from the stimulus takes even longer.

Harper's economic package faces similar delays, even with the best intentions of government to get the money flowing. Projects that require agreement from three levels of government as well as design and permit delays before "shovels get in the ground" aren't likely to stimulate the economy for at least the next six months. The miniscule tax cuts won't be noticed on most pay cheques, and may not be put in place by many employers until July, since Revenue Canada usually updates its tax deduction tables only twice a year, January and July. Contrast those delays, or "lags" as economists like to call them, with the immediate effect a reform of employment insurance eligibility would have had.

Despite all the hype with big deficit numbers most of those deficits are the result of government revenues collapsing as a result of the recession. It will be months before government deficits start increasing because of accelerated spending, and it will be even longer before any effects are seen in the economy.