Budgets are generally analyzed for their major initiatives and announcements. Typically they announce a new program or a major tax change. Yet, all too often their most meaningful aspects are not announced or analyzed at all. The 2012 Budget is like this. There was one major announcement; the decision to gradually raise the eligibility for old age security from 65 to 67. It might be concluded that there is little of great interest in this Budget. This would be a mistake.
This is a very fateful Budget and it can be boiled down to one issue. Canada has finally begun to address the implications of being an aging society. Being an aging society means, as the government points out, two workers will have to produce as much value by 2030 as seven did in the 1970s. If they aren’t able to do this, then we will become collectively poorer. If we become collectively poorer, the question become who will become individually poorer and
by how much.
What does “getting poorer” actually mean? In its most obvious sense, it means less take-home pay or discovering that our money doesn’t go as far as it used to. However, it could also mean some combination of poorer health care, poorer pensions, larger class sizes or higher tax rates. In this sense, we would become “materially poor”. And it could also mean people having to work longer hours or retire much later in life. In this sense, we would become“time poor”.
None of these consequences is very attractive. So the government, quite correctly, devotes considerable time in this budget to addressing how we can avoid becoming poorer.
We can avoid becoming poorer by producing more value from each worker. If we’re lucky, the resource boom will continue. When resource prices rise, it automatically makes workers more productive. If we couple this with improvements in our resource management, trade arrangements and transportation infrastructure we would likely see productivity improvements. The Budget quite rightfully devotes some discussion to this and to the consequences of lengthy, sometimes confused, approval processes.
The government also addresses two other items aimed at improving productivity: getting better value out of government and improving our innovation performance.
A detailed analysis of either of these things would require considerably more information than was available in the 2012 Budget. At present, we can just note that the challenge is correctly stated. If we can make government more efficient and improve our innovation performance, then we will improve productivity.
To understand the issues concerning government productivity, we need to understand one thing. Costs in many program areas of the federal and provincial governments are already growing faster than our ability to pay. Cost pressures in many of the same areas will increase still further as society ages. Either we are looking at large tax increases, which will likely further dampen productivity growth, or we’re going to have to find other ways to provide
many of these services.
Innovation refers to the application of ideas, such as scientific research, to products or production systems so as to increase the value of the products or reduce the costs of producing them. Either way, this increases productivity. Innovation lies at the heart of the productivity challenge. Successfully innovative economies eventually become the richest economies. The Budget again states the challenge well. Canada makes enormous investments in training and education. Despite this, our performance with respect to innovation lags well behind most First World countries. If this doesn’t improve then obviously our productivity challenge will become more difficult.
While the Budget is very explicit in articulating the issues surrounding our productivity, it is just the opposite in framing the issue of “who pays?” if we fail to meet this challenge. In fact, it’s not stated explicitly at all. However, we should not be under delusions. If we don’t become more productive, we will become poorer. If we become poorer, it means some combination of the following events:
(a) taxes will rise;
(b) government services will be cut back;
(c) wages and salaries will decline;
(d) pensions will be reduced;
(e) price levels will rise;
(f) people will have to work longer hours; and,
(g) people will have to delay retirement.
The events marked (a) to (e) imply that we will become materially poorer. The events (f) and (g) imply we will become time poorer.