1

Building Canada

for the 21st Century --

A Strong Economy and

a Secure Society

Highlights

▪	The budget will be balanced in 1997-98 -- the first balanced budget since 1969-70.

▪	The budget will also be balanced in 1998-99 and 1999-2000 -- the first time in almost 50 years that the budget will be in balance for three consecutive years.

▪	Canada's debt burden will be put on a permanent downward track through sustained economic growth and a debt repayment plan.

▪	The Canadian economy strengthened in 1997, with 372,000 jobs created -- all full time and in the private sector.

▪	Continued strong economic growth and job creation are expected for 1998 and 1999.

▪	The Canadian Opportunities Strategy will expand access for all Canadians to the knowledge, skills and learning needed for the job opportunities of the 21st century.

▪	The amount of income that low-income Canadians can receive on a tax-free basis will be increased by $500, taking 400,000 Canadians off the tax rolls.

▪	The 3-per-cent general surtax will be eliminated for almost 13 million taxpayers with incomes up to about $50,000, and reduced for an additional one million taxpayers.

▪	As part of the National Child Benefit System, a further increase in the Canada Child Tax Benefit will be phased in over two years.

▪	The child care expense deduction will be enriched and other targeted tax assistance will be provided to promote a strong economy and a secure society.

▪	Over the next three years, $7 billion of tax relief is being provided, primarily to low- and middle- income Canadians.

▪	Eighty per cent of the new spending initiatives reflect two of the highest priorities of Canadians -- access to knowledge and skills, and increased funding for health and education through increased transfers to the provinces.

▪	Program spending will continue to decline relative to the size of the economy. It is projected to fall to 11.5 per cent of gross domestic product (GDP) in 1999-2000 -- its lowest level in 50 years.

Introduction

The government's key priority is to build a strong economy and a secure society for the 21st century. These two goals are mutually reinforcing.

▪	A strong economy creates employment opportunities and generates the resources needed to maintain and enhance programs that contribute to a secure society.

▪	A secure society provides Canadians with the means and sense of security necessary to adjust to the changes in a modern economy.

Restoring fiscal health and modernizing government programs have been prerequisites to achieving the government's economic and social objectives. Strong and durable economic growth could not have been achieved without first addressing Canada's fiscal problem.

Chart 1.1 (See BP1-1E.WMF OR WPG)

But even while the fiscal problem was being addressed, the government made a number of strategic investments, through targeted programs and tax measures. These investments were in areas that promised a high economic return, such as knowledge and skills, or were a key priority for Canada's health and social objectives.

This strategy is paying off. The economy is now growing strongly and creating job opportunities for Canadians. The unemployment rate has fallen and consumer and business confidence are at their highest levels in many years. Private sector economists predict that economic growth will remain strong in 1998 and 1999. Canada's economic growth is expected to be the strongest of all Group of Seven (G-7) countries in 1998. Overall, the economic environment in Canada is more positive than it has been in 25 years.

This budget marks the start of a new fiscal era. The government is now planning on the basis of balanced budgets and a steady decline in the debt burden.

As a result of the structural changes introduced since 1993, a positive fiscal dynamic is now emerging. The government intends to use the increased financial resources that will become available to strengthen the economy and make Canada a more secure society.

Maintaining Sound Economic

and Financial Management

The greatest contribution the government can make to enhancing opportunity and security is to maintain sound economic and financial management. Based on the financial results for the first nine months of 1997-98, expected developments over the balance of the fiscal year, and including the measures announced in this budget, the budget will be balanced this fiscal year. This will mark the first balanced budget since 1969-70.

The government will build on the fiscal progress achieved to date by pursuing policies that contribute to sustained, strong economic growth and by implementing a debt repayment plan that will reduce the absolute amount of the debt. The Debt Repayment Plan is based on three key elements:

▪	as before, two-year fiscal plans based on prudent economic planning assumptions; the current plan commits to balanced budgets in 1998-99 and 1999-2000;

▪	the inclusion in the fiscal plan of a Contingency Reserve of $3 billion in each year; and

▪	the use of the Contingency Reserve, when it is not needed, to pay down the public debt. (Chart 1.2)

This will ensure that the debt-to-GDP ratio is put on a permanent downward track.

The commitment to balanced budgets in both 1998-99 and 1999-2000 also means that:

▪	there will be ongoing financial surpluses; and

▪	there will be a steady repayment of the federal government's market debt -- the debt that it had to borrow on credit markets.

Other major industrialized countries report their budget balance on the basis of financial requirements/surplus -- essentially the cash requirements or surplus resulting from government operations. On that basis, the federal government recorded a surplus of $1.3 billion in 1996-97 (Table 1.1). This was the best performance among the G-7 countries, including the United States. A financial surplus of about $12 billion is expected for 1997-98. Over the first nine months of 1997-98, the government had repaid $12.9 billion of market debt. Sizeable financial surpluses are expected to continue through 1999-2000.

Chart 1.2 (See BP1-2E.WMF or WPG)

A successful debt reduction strategy requires that fiscal action be complemented by investments that are essential to long-term job creation and the economic health of the country. The government will therefore continue to make strategic investments to enhance the knowledge and skills of Canadians, to make Canadian society more secure, and to reduce taxes. This balanced approach -- sustained economic growth and a reduction in the absolute level of the debt -- is the best way of ensuring that the debt burden is reduced in a steady and sustained manner.

The fiscal outlook presented in Table 1.1 includes all spending and tax measures introduced since the 1997 budget -- measures that will contribute to a stronger economy and a more secure society. Even taking this into account, total program spending as a percentage of the economy (GDP) is projected to decline over the next two years, to 11.5 per cent by 1999-2000. This is down from 16.6 per cent in 1993-94 and marks its lowest level in 50 years.

Table 1.1

Summary statement of transactions:

fiscal outlook with budget measures

1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 (billions of dollars) Budgetary revenues 116.0 123.3 130.3 140.9 147.5 151.0 155.0 Program spending 120.0 118.7 112.0 104.8 106.0 104.5 107.0 Operating balance -4.0 4.6 18.3 36.1 41.5 46.5 48.0 Public debt charges 38.0 42.0 46.9 45.0 41.5 43.5 45.0 Underlying balance -42.0 -37.5 -28.6 -8.9 0.0 3.0 3.0 Contingency

Reserve 3.0 3.0 Budgetary balance -42.0 -37.5 -28.6 -8.9 0.0 0.0 0.0 Net public debt 508.2 545.7 574.3 583.2 583.2 583.2 583.2 Non-budgetary

transactions 12.2 11.6 11.4 10.2 12.0 6.0 9.0 Financial requirements/

surplus (excluding

foreign exchange

transactions)

-29.8

-25.8

-17.2

1.3

12.0

6.0

9.0 Per cent of GDP Budgetary

revenues 16.0 16.2 16.3 17.2 17.2 16.9 16.7 Program spending 16.6 15.6 14.0 12.8 12.4 11.7 11.5 Operating balance -0.6 0.6 2.3 4.4 4.8 5.2 5.2 Public debt

charges 5.2 5.5 5.9 5.5 4.8 4.9 4.9 Budgetary balance -5.8 -4.9 -3.6 -1.1 0.0 0.0 0.0 Net public debt 70.2 71.6 71.9 71.1 68.1 65.4 62.9 Financial

requirements/

surplus

-4.1

-3.4

-2.2

0.2

1.4

0.7

1.0

One of the cornerstones of sound economic and financial management is controlling the rate of inflation. The government and the Bank of Canada have agreed to extend the current inflation control targets, which keep inflation within a band of 1 per cent to 3 per cent, until the end of 2001. The extension of the inflation control targets will help to keep Canada's inflation rate among the lowest in the world which, in turn, will help to maintain Canada's low interest rates.

The Canadian Opportunities Strategy

Education, knowledge and skills are essential for Canadians to participate in, and benefit from, economic growth. This is especially crucial when that growth is increasingly dependent on the application of knowledge and skills. While the government cannot guarantee equality of outcomes, it can strive to ensure that Canadians have equality of opportunity.

This budget builds on actions taken in previous budgets to provide Canadians with enhanced access to knowledge and skills. It announces the Canadian Opportunities Strategy which will:

▪	provide more than 100,000 students with Canada Millennium Scholarships averaging $3,000 per year, and up to 25,000 students in financial need with children or other dependants with new Canada Study Grants;

▪	increase assistance for advanced research and for graduate students through increased funding for the three granting councils;

▪	help graduates manage their student debt loads by providing tax relief for interest payments on student loans, and improving the Canada Student Loans Program to help borrowers facing financial difficulties;

▪	help Canadians upgrade their skills throughout their working lives by allowing tax-free withdrawals from their registered retirement savings plans (RRSPs) for lifelong learning, and by extending the education tax credit and the child care expense deduction to part-time students;

▪	ensure that families can better afford higher education for their children by providing stronger incentives for saving through the new Canada Education Savings Grant, which will provide a grant of 20 per cent on the first $2,000 of annual contributions made to registered education savings plans (RESPs) for children up to age 18;

▪	support youth employment by more than doubling funding for youth at risk who lack basic education and job skills, and by providing employers an employment insurance premium holiday for additional young Canadians hired in 1999 and 2000; and

▪	increase funding for the SchoolNet, Community Access, and Canadian Network for the Advancement of Research, Industry and Education (CANARIE) programs to help bring the benefits of information technology into more classrooms and communities across Canada.

Taken together, and in combination with initiatives announced in previous budgets, these measures will give Canadians significantly greater and more affordable access to the knowledge and skills that will be necessary to succeed in the 21st century.

Building a Secure Society

Strong national programs are key to ensuring that Canadians have a sense of security and confidence in their future, and the means to pursue their economic objectives and a better quality of life.

Canadians need to know that their health care system will provide quality care for them when they need it. That is why the very first and most significant initiative the government took as a result of the better fiscal performance was to introduce legislation in December 1997 to raise the cash floor of the Canada Health and Social Transfer (CHST) from $11 billion to $12.5 billion. This means that, between 1997-98 and 2002-03, provinces will receive an additional $7 billion in transfer payments.

Canadians also need to know that the retirement income system will be there for them when they retire. Last year, the federal government, in partnership with provincial governments, agreed to reforms that preserve the Canada Pension Plan for the long term. The government will be introducing legislation to reform the second pillar of Canada's retirement income system -- the Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) programs -- replacing them with a new Seniors Benefit. The Seniors Benefit will ensure that those who need public pensions in the future can count on them. Low-income seniors, most of whom are women, will see enhanced pensions.

This budget provides funding for initiatives set out in Securing Our Future Together, as well as other policy initiatives announced since the last budget. These policy initiatives include: renewing Canada's blood system in partnership with the provinces; implementing the international treaty on the prohibition and destruction of anti-personnel mines; and building a new partnership with Canada's aboriginal peoples.

In the February 1997 budget, the government announced increased federal funding to the Child Tax Benefit as a step towards a National Child Benefit System. The new system will have two parts: a federal platform for all eligible Canadian families -- to be called the Canada Child Tax Benefit -- and provincial supplements that will vary in amount and design. The federal government announced, in the February 1997 budget, an $850 million increase to the Canada Child Tax Benefit, which will take effect July 1998 and provide increased assistance to over one million children and their families.

The 1997 budget also committed to further enrich the Canada Child Tax Benefit. This budget honours that commitment by allocating $425 million as of July 1999 and an additional $425 million as of July 2000.

In addition, this budget announces:

▪	deductibility of health and dental plan premiums for self-employed Canadians; and

▪	increased support for families, notably through a new caregiver tax credit, increased limits for the child care expense deduction and increased support for persons with disabilities.

General Tax Relief for Canadians

This budget marks the beginning of general tax relief for Canadians, starting with those who need it most -- low- and middle-income Canadians. This budget announces that:

▪	the amount of income that low-income Canadians can receive on a tax-free basis will be increased by $500, taking almost 400,000 Canadians off the tax rolls; and

▪	the 3-per-cent general surtax will be eliminated for almost 13 million taxpayers with incomes up to about $50,000 and reduced for an additional one million taxpayers.

Summary of Spending and Tax Actions

The net fiscal impact of actions (spending and tax) proposed since the 1997 budget is provided in Table 1.2. The fiscal cost of the spending and tax initiatives proposed in this budget amounts to $2.6 billion in 1997-98, $1.8 billion in 1998-99, $3.2 billion in 1999-2000 and $4.1 billion in 2000-01. The initiatives proposed in the Canadian Opportunities Strategy and in Building a Secure Society include some initiatives which were originally announced in Securing Our Future Together, as well as a number of tax expenditure measures. The initiatives proposed in General Tax Relief for Canadians consist of the increase in the amount of income that low-income Canadians can receive on a tax-free basis and the elimination of the 3-per-cent general surtax for Canadians with incomes up to about $50,000.

Table 1.2

Spending and tax initiatives since the 1997 budget

1997-98 1998-99 1999-00 2000-01 (millions of dollars) Spending and tax

measures announced

in this budget Canadian

Opportunities

Strategy

2555

650

1085

1230 Building a secure

society

90

264

714

1169 General tax relief

for Canadians 880 1445 1680 Tax fairness

measures -5 -25 30 Total 2645 1789 3219 4109 Spending and tax

measures announced

before the budget Building a secure

society Increase in CHST

transfer payments

200

900

1500

1500 New partnerships

with aboriginal

peoples

350

126

126

126 Other 40 136 191 161 Total 590 1162 1817 1787 Tax relief for

Canadians

(EI premium rate

reduction)

235

465 Other Securing Our

Future Together

3

85

85

83 Total 828 1712 1902 1870 Total 3473 3501 5121 5979

The budget also provides funding for the other initiatives announced since the 1997 budget. Most of these were announced in Securing Our Future Together. These include the increase in the cash floor under the Canada Health and Social Transfer to provinces and funding for other health care initiatives, culture and economic development initiatives, among others. In addition, funding is provided for Gathering Strength -- a new partnership with Canada's aboriginal peoples -- and for the reduction in the employment insurance premium rate from the February 1997 budget assumption of $2.80 to $2.70 for 1998. In total, the cost of these actions amounts to $828 million in 1997-98, $1.7 billion in 1998-99, and $1.9 billion in both 1999-2000 and 2000-01.

Over the four years, 1997-98 to 2000-01, the net fiscal impact of the new investments and tax relief since the 1997 budget amounts to $18.1 billion. (See Annex 1 for details.) Of this amount, $10.9 billion represents spending initiatives. Most of this increased spending is for the Canadian Opportunities Strategy ($4.7 billion or 43 per cent) and for the increase in the Canada Health and Social Transfer ($4.1 billion or 38 per cent). As a result, 80 per cent of the spending initiatives reflect two of the highest priorities of Canadians -- access to knowledge and skills, and increased funding for health and education transfers to provinces and territories.

Table 1.3

Spending and tax initiatives since the 1997 budget

1997-98

1998-99

1999-00

2000-01 Cumu-

lative

total (millions of dollars) Spending Initiatives The Canadian Opportunites

Strategy Canada Millennium

Scholarships

2500

2500 Other initiatives 55 530 725 850 2160 Building a secure society Increased CHST cash

transfers 200 900 1500 1500 4100 Other initiatives 480 466 491 461 1898 Other Securing our

Future Together 3 85 85 83 256 Total 3238 1981 2801 2894 10914 Targeted and general tax relief The Canadian Opportunities

Strategy 120 360 380 860 Building a secure society 130 610 1065 1805 General tax relief 880 1445 1680 4005 Tax fairness measures -5 -25 30 0 Actions before budget 235 395 -70 -70 490 Total 235 1520 2320 3085 7160 Total spending and tax initiatives 3473 3501 5121 5979 18074 The Debt Repayment Plan: up to (assuming that Contingency Reserve not required) 3000 3000 3000 9000

The targeted and general tax relief actions total $7.2 billion over the four years. Of this amount, $7 billion is announced in this budget for the next three years.

Under The Debt Repayment Plan, the Contingency Reserve, if not required, will be used to pay down the public debt. Over this period, up to $9 billion could be used to pay down the public debt.

Outline of the Budget Plan

▪	Chapter 2 reviews recent economic developments and prospects for Canada. It establishes the economic planning assumptions that underlie the government's budget plan.

▪	Chapter 3 reviews the progress achieved to date in restoring fiscal health. It describes The Debt Repayment Plan and provides a detailed fiscal outlook through 1999-2000. It also announces the extension of the current inflation control targets to 2001.

▪	Chapter 4 announces the Canadian Opportunities Strategy, which will: provide financial assistance to students through the Canada Millennium Scholarships and Canada Study Grants; increase funding for the three granting councils; assist graduates in managing their student debt loads through tax relief for interest payments on student loans and improvements to the Canada Student Loans Program; help Canadians upgrade their skills through their working lives by allowing tax-free withdrawls from RRSPs and extending the education tax credit and the child care expense deduction to part-time students; provide incentive for parents to save for their children's education through a new Canada Education Savings Grant; support youth employment through increased funding for youth at risk and an employment insurance premium holiday for employers hiring additional youth in 1999 and 2000; and increase funding to bring the benefits of technology into more classrooms and communities across Canada.

▪	Chapter 5 describes the initiatives that were announced prior to the 1998 budget to build a more secure society. These include funding to further improve Canada's health care system, to support Canada's commitment to the Ottawa Process on Landmines, and to build a new partnership with Canada's aboriginal people. Chapter 5 also introduces a number of new initiatives to promote a secure society, including the proposed increase to the Canada Child Tax Benefit and the proposed increase in the child care expense deduction for working families.

▪	Chapter 6 announces two major initiatives to reduce personal income taxes. It proposes an increase in the amount of income that low-income Canadians can receive on a tax-free basis and the elimination of the 3-per-cent general surtax for Canadians earning up to about $50,000.

There are also a number of annexes.

▪	Annex 1 allocates the various initiatives since the February 1997 budget between spending initiatives and tax actions.

▪	Annex 2 describes three different measures of the federal fiscal position -- the budgetary balance, the financial balance (requirements/surplus) and the national accounts budget balance (deficit/surplus) -- and provides a discussion and reconciliation of these three measures.

▪	Annex 3 provides an update of the fiscal situation of the total government sector in Canada.

▪	Annex 4 compares Canada's fiscal situation with that in other major industrialized countries.

▪	Annex 5 describes the fiscal sensitivity of the federal fiscal situation to changes in economic growth and interest rates.

▪	Annex 6 outlines the government's response to the 1997 Report of the Auditor General and his observations on the Government of Canada's financial statements.

▪	Annex 7 provides supplementary information on the tax measures contained in this budget.