Tax Measures Welcome, But Spending Pattern Jeopardizes Longer-Term Fiscal Health, Business Leaders Say

February 18, 2003

The elimination of the federal capital tax and other tax reductions in the 2003 budget will have a positive impact on Canada’s competitiveness and growth, but the budget’s huge spending increases jeopardize Canada’s longer-term fiscal prospects, says the Canadian Council of Chief Executives (CCCE).

“Eliminating the capital tax removes a major disincentive to business investment in this country,” said Council President and Chief Executive Thomas d’Aquino. While he said he was mystified by the decision not to remove the parallel levy on financial institutions, he also praised Finance Minister John Manley’s commitment to a comprehensive review of existing program spending.

“I have to note, however, that even if program review achieves its goal of reallocating $1 billion from old programs to new needs, it will fund just a small fraction of the new commitments being made in this budget,” Mr. d’Aquino said.

Among other positive measures announced in the budget, Mr. d’Aquino also noted the increases to retirement savings plan contribution limits, extension of the 21 percent corporate tax rate to the resource sector, the cut in the Air Travellers Security Charge and the further reduction in Employment Insurance premiums.

Mr. d’Aquino also expressed support for a number of other measures in the budget. In particular, he noted the government’s commitment to enhancing border security and infrastructure, Canada’s presence in the United States, and support for international development.

He also applauded plans to update the corporate governance standards required by the Canada Business Corporations Act and to provide more resources for the investigation and prosecution of corporate crime.

While supporting many of the individual measures included in the budget, the Council expressed serious worry about the overall pattern of federal spending.

The budget will raise federal program spending by $14.5 billion or 11.5 percent in the current fiscal year alone. This comes on top of significant spending increases in the past two years, bringing the total increase to about $29 billion, a rise of 27 percent in just three years. “I hope that this pace of spending growth proves short-lived and does not represent a fundamental shift away from the principles of sound fiscal management,” Mr. d’Aquino concluded.

He noted that some of the new spending, including significant increases for defence and health care, is clearly required, but said the overall pattern of spending gives rise to two major concerns. “First, too few of the budget’s many measures are directed at improving Canada’s productivity and competitiveness. Second, not enough emphasis has been put on prudence at a time of great global uncertainty,” Mr. d’Aquino said.

“Given the risks of conflict in Iraq, turmoil in Venezuela and economic worries in many countries including Japan, the United States and much of Europe, the times call for an extraordinary degree of fiscal prudence.”

The CCCE, composed of the chief executive officers of 150 leading Canadian corporations, was known as the Business Council on National Issues until late 2001. Its members head companies that administer in excess of $2.1 trillion in assets, have annual revenues of more than $500 billion and account for a significant majority of Canada’s private sector investment, exports, training and research and development.