The federal budget of 2005 is already being remembered for what wasn’t in it, now that the Liberals have placed promised corporate income tax cuts on indefinite hold.

As the House of Commons got back to work in September after summer recess, Finance Minister Ralph Goodale announced the tax cuts for large corporations, originally included in last February’s budget, are postponed because the government doesn’t want to lose a non-confidence vote this fall.

To survive such a vote, the government needs the continued support of the New Democratic Party, which insisted on removal of corporate tax cuts as the price of its support when the Liberals survived last spring’s non-confidence vote on the main budget bill.

Although Goodale had stated last spring he planned to reintroduce separate legislation this fall to cut the corporate tax rate to 19% from 21%, there was no hint of a new announcement date beyond this fall. The cuts, estimated to be worth $2.6 billion over five years, would have gone into effect in 2008.

As most Canadians are aware, the Liberals enlisted the support of the NDP to fend off a non-confidence motion by the Conservatives and Bloc Québécois last May in return for $4.6 billion in social spending, providing there is a surplus, and withdrawal from the budget of corporate tax relief.

For anyone getting frustrated with government fiscal policy, David Perry, senior research associate at the Canadian Tax Foundation, has some advice: get used to it, thanks to a wild card called the NDP.

As long as the Liberals need the NDP’s support to prop up their minority government, the corporate sector will have to wait for tax relief, even though the Liberals were able to cut the corporate tax rate to 21% from 28% with hardly a ripple of protest in 2000.

This time, the Liberals will need the NDP’s support for the duration of this Parliament, until Prime Minister Paul Martin calls an election, as he has promised to do within 30 days after the final report of the Gomery inquiry, or until the Grits lose a non-confidence vote.

Perry believes these two quid pro quo partners should be considered natural allies as long as minority government persists.

The NDP has yet to win enough seats in the House of Commons to enjoy the kingmaker status it held during Pierre Trudeau’s minority government from 1972-74, but it is likely to have continued influence in the budgetary process, Perry says. Predicting the government’s fiscal policy will be far more difficult as long as the balance of power in the Commons remains precarious, he adds.

The Liberals’ political need to keep the NDP onside may also be a pressuring influence as the government struggles to cope with the dramatic rise in income trusts and their effect on tax revenue (see page B17).

A Department of Finance consultation paper in September made it clear Ottawa is looking at such measures as limiting interest expense deductions or applying corporate tax rules to income trusts to stop the leakage of tax revenue. Ottawa is consulting with the income trust industry on possible policy changes, but it has halted advance income tax rulings on trust proposals, throwing the sector into chaos.

The Liberals were known to be working on a pre-election mini-budget. But now that Justice John Gomery has delayed his final report until Feb. 1, the Liberals now have the option of waiting until February for a traditional budget.

Will the 2006 budget, a pre-election budget, contain corporate tax cuts that weren’t
supposed to take effect until 2008 anyway? There is wide speculation that it will.

After all, notes pollster Richard Jenkins of TNS Canadian Facts, this is the first Canadian government with three strengths that represent a perfect storm for the Conservatives.
Times are so good and government revenue so strong that this government can continue to reduce debt, increase spending and cut taxes all at the same time. As long as each part of this fiscal policy troika is done carefully enough to maintain balance, the federal budget will remain the Liberals’ most powerful tool for staying in power.

Pollsters such as Nikita Nanos of SES Research believe the slumping fortunes of Conservative Leader Stephen Harper and his party will tempt the governing party to grab support of old-line Conservatives with tax cuts.

@page_break@As for the rest of the 2005 budget, Bill C-43, the main budget bill, was passed and was given royal assent at the end of June. It contains the main financial appropriations that were announced in February.

This legislation is responsible for a wide range of changes, including removal of the 30% limit on foreign content in pension and retirement portfolios, increased deposit insurance protection to $100,000 from $60,000, and small increases to old-age pensions. One bit of corporate tax relief that did survive the spring session was elimination of the corporate surtax.

Meanwhile, over the summer, Finance published a catalogue of proposals, as it usually does, for enabling legislation that will be needed to execute fully the budget from the previous winter.

This year’s list contains 15 amendments to the Income Tax Act, including rules for
claims of medical expense tax credits and special rules applying to bankrupt individuals.

Although the government’s main budget bill has passed, a dispute continues between the Liberals and their new allies over the $4.6-billion social spending agreement, which enabled passage of the budget.

NDP finance critic Wendy Wasylycia-Leis and John McKay, parliamentary secretary to Finance Minister Ralph Goodale, have been feuding throughout the summer.

Neither side seems to know where the dispute will go next or whether it will interfere with their parliamentary alliance.

Both the Liberals and NDP are interpreting their agreement differently, but neither side will release the text of the agreement.

The NDP says the agreement applies to the surplus just announced on Sept. 21, but the Liberals say it applies to the surplus of the current fiscal year, 2005-06, which won’t be signed off by the auditor general until at least next August.

McKay told the Senate finance committee in June that the $4.6 billion in social spending won by the NDP won’t start flowing until August 2006 at the earliest.

Said the NDP’s Wasylycia-Leis in response: “I don’t think John knows what he is talking about.’’

She says she checked with the office of Government House Leader Tony Valeri, and confirmed payments will start rolling this fall — in 2005. But Al Toulin, communications director to Valeri, says it is Wasylycia-Leis who is on the wrong track.

Toulin says the agreement covers the current fiscal year, and the $4.6 billion won’t start flowing until the government is ready to confirm the surplus amount for the current fiscal year. The federal auditor general usually does not sign off on the government’s bottom line until the following August or September.

While this little spat may not overturn the Liberal/NDP fiscal alliance, the 2005 budget and the consequences of it could be in the news for a long time. IE