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A Stronger Canada Through a Stronger Economy

Introduction

Advantage Canada, our long-term economic plan, creates five Canadian advantages to help improve our quality of life and ensure a strong economy:

• Fiscal Advantage—Will continue to reduce the federal debt, thus contributing to the objective of eliminating Canada’s total government net debt in less than a generation, creating a strong foundation on which to build sustainable prosperity.


• Infrastructure Advantage—Will create modern, world-class infrastructure to ensure the seamless flow of people, goods and services across our roads and bridges, through our ports and gateways, and via our public transit.


• Entrepreneurial Advantage—Will reduce unnecessary regulation, red tape and the tax compliance burden to unlock business investment. By building a more competitive business environment, consumers will get goods at lower prices and Canadian businesses will be better equipped for global success.


• Knowledge Advantage—Will create the best-educated, most-skilled and most flexible workforce in the world.


• Tax Advantage—Will reduce taxes for all Canadians and establish the lowest tax rate on new business investment in the Group of Seven (G7).

Budget 2007 takes concrete action to achieve these advantages and make Canada a world leader for today and future generations.

Fiscal Advantage

Budget 2007 lowers government debt, which means that less of taxpayers’ money goes to pay interest on the public debt. This budget also legislates the Tax Back Guarantee, which directs the money saved from paying less interest on the debt to personal income tax reductions for Canadians. Budget 2007 takes action on creating a Fiscal Advantage in Canada by:

• Planning for debt reduction of $9.2 billion in 2006–07, which combined with last year’s surplus of $13.2 billion, brings total federal debt reduction to $22.4 billion over two years.


• Reducing the federal debt-to-GDP (gross domestic product) ratio from 35 per cent in 2005–06 to 30 per cent by 2008–09. Canada is on target to reach the objective of a 25 per cent debt-to-GDP ratio by 2012–13.


• Delivering on the Tax Back Guarantee by dedicating over $1 billion per year in debt interest savings to ongoing personal income tax reductions.


• Enacting a new Expenditure Management System to ensure better value for Canadian tax dollars by reducing waste and making government more efficient through ongoing reviews of all departmental spending on a four-year cycle.

Lower government debt means that less of taxpayers’ money goes to pay interest on public debt—leaving more money for things that matter. That’s why Advantage Canada sets out a Fiscal Advantage for Canadians. Central to Canada’s Fiscal Advantage is the Government’s strong belief that we should reduce public debt.

Budget 2007 creates a Tax Back Guarantee. When government debt is reduced, interest payments are also reduced. Those lower interest payments will be returned to Canadian taxpayers through personal income tax reductions.

Reducing Government Debt

Low public debt is essential to the country’s long-term prosperity. Lower debt helps keep interest rates low and frees up funds currently absorbed by interest costs for more productive uses such as lower personal income taxes. Low debt levels also strengthen our financial ability to deal with economic shocks and challenges, such as the aging of the population. Most importantly, debt represents a tax on future generations. Debt reduction, therefore, is about fairness and equity toward future generations.

Advantage Canada committed to reduce the federal debt burden. It also proposed the objective of eliminating total government net debt in less than a generation.

 

Federal debt reduction in 2005–06 was $13.2 billion. For the year underway, the Government is planning on reducing the debt by $9.2 billion, for a total debt reduction of $22.4 billion over two years. With this achievement, the Government will reduce the federal debt-to-GDP ratio to below 30 per cent by 2008–09, on track to deliver on its commitment to reduce the ratio to 25 per cent by 2012–13. This will bring the federal debt burden to its lowest level since the late 1970s.

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 Organisation for Economic Co-operation and Development (OECD) to compare the public debt burden across countries is total government net debt. As outlined in Advantage Canada, the Government believes that we should aim as a country to eliminate Canada’s total government net debt by 2021.

Taken together, provincial governments recorded an aggregate budgetary surplus of $13.1 billion in 2005–06. The most recent projections for 2006–07 show an aggregate surplus of $8.0 billion (or $9.3 billion if contingency reserves are added back to the projected surplus). For 2007–08 and 2008–09, aggregate surpluses are also projected at the provincial level. With the federal fiscal plan set out in this budget and the strong budget position at the provincial level, Canada remains on track to eliminate total government net debt by 2021.

To complement the goal of eliminating the country’s net debt, the Government will publish a comprehensive fiscal sustainability and intergenerational report with the 2007 Economic and Fiscal Update. The report will provide a broad analysis of current and future demographic changes and the implication of these changes for Canada’s long-run economic and fiscal outlook. The publication of a report on fiscal sustainability is motivated by the Government’s view that maintaining sustainable public finances at all orders of government is a critical condition to achieving intergenerational equity and strong and sustained economic growth.

Table 5.1
Provincial Budgetary Balances (millions of dollars)

	2005–06 (Actual)	2006–07 (Projection)
Newfoundland and Labrador	199	-40
Prince Edward Island	1	1
Nova Scotia	228	65
New Brunswick	243	22
Quebec	37	17
Ontario	298	-1,949
Manitoba	31	2
Saskatchewan	400	5
Alberta	8,551	6,981
British Columbia	3,060	2,850
10-province total	13,048	7,9541
1 Excluding the impacts of contingency reserves, the aggregate budgetary balance for the provinces is expected to be $9.3 billion in 2006–07. Sources: Provincial government budgets. Data up to and including February 27, 2007.

Tax Back Guarantee

Budget 2007 delivers on Advantage Canada’s commitment to dedicate all interest savings from federal debt reduction each year to ongoing personal income tax reductions. This is the Government’s Tax Back Guarantee. It will ensure that Canadians benefit directly from federal debt reduction.

 

The Tax Back Guarantee amounts to $1.1 billion in 2007–08 and nearly $1.3 billion in 2008–09. These amounts correspond to the interest savings resulting from the debt reduction of $13.2 billion in 2005–06 and $9.2 billion in 2006–07, as well as the planned debt reduction of at least $3 billion per year over the next two years. The interest savings enhance the Government’s ability to deliver on new personal income tax reductions in this budget, including the introduction of the Working Income Tax Benefit, the $2,000 child credit, raising the spousal amount, and increasing the age limit for converting a registered retirement savings plan (RRSP). Combined with personal income tax reductions announced in the Tax Fairness Plan on October 31, 2006, these measures total $3.7 billion in each of the next two years, exceeding the amount attributed to the Tax Back Guarantee by $2.6 billion in 2007–08 and $2.4 billion in 2008–09.

To ensure that Canadians continue to benefit from the interest savings associated with continued federal debt reduction, the Government will set out the Tax Back Guarantee in legislation. Lower personal income taxes will offer Canadians greater incentives to work as well as the opportunity to keep more of their hard-earned tax dollars, thereby increasing their standard of living and quality of life.

Table 5.2
Personal Income Tax Reductions Since Budget 2006 (billions of dollars)

	2007–08	2008–09
Tax Back Guarantee	1.1	1.3
Personal Income Tax Reductions in Budget 2007
Child tax credit	1.4	1.5
Working Income Tax Benefit	0.6	0.6
Spousal amount raised to equal the basic personal amount	0.3	0.3
Increasing age limit for converting an RRSP	0.1	0.1
Other	0.3	0.2
Total	2.7	2.6
Tax Fairness Plan Personal Income Tax Reductions	1.0	1.1
Total Personal Income Tax Reductions Since Budget 2006	3.7	3.7
Personal Income Tax Reductions Since Budget 2006   Over and Above the Tax Back Guarantee	2.6	2.4
Note: Totals may not add due to rounding.

Smarter Government Spending

Some government expenditures that might have been important in the past are simply no longer needed. These unnecessary expenditures draw money away from more important priorities. In Budget 2006 and in Advantage Canada, Canada’s New Government began the development of an important new concept to ensure taxpayers’ dollars are being spent as effectively as possible.

 

The new Expenditure Management System will fundamentally change the way government operates. The objectives and outcomes of all spending programs will be clearly communicated to Canadians, demonstrating the value that they receive for their tax dollars. Specifically, under the new system:

• New spending proposals submitted to Cabinet will clearly define objectives and expected results and demonstrate how they relate to existing programs and the priorities of the Government.


• All departments will be required to manage their programs against these results, formally evaluate program performance, and identify ongoing priorities.


• Treasury Board will lead a review of each department’s spending.

• The results of the reviews will be integrated into budget planning.

It will also contribute to achieving the Government’s commitment to limit the growth of program spending, on average, to below the rate of growth of the economy.

Program expenses as a share of GDP rose rapidly between 2000–01 and 2004–05. This trend was reversed in 2005–06, when nominal spending fell by 1 per cent, the first annual decline in nine years. While spending growth will exceed the rate of growth in the economy in 2006–07, it will slow in the subsequent two years. This means that from 2005–06 to 2008–09, the rate of growth of program spending will average 4.1 per cent, which is below the expected rate of growth of nominal GDP over this period, which is projected to average 5 per cent.

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