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37 Tax Memo 1 (1965)

handle is hein.journals/taxmmo37 and id is 1 raw text is: TAX No.37 MEMO March, 1965 FEDERAL BUDGET OUTLOOK-1965 Speculation about Finance Minister Gordon's third budget centres around two questions. To what extent will he adopt the thinking and goals of the Economic Council of Canada as revealed in its first report? More precisely, will he interpret its prescription for prosperity as a call for tax cuts now? The Foundation's annual budget forecast does not attempt to second guess the Minister on policy ques- tions. Instead it attempts only to outline the room he has for manoeuvre, given present tax rates and certain assumptions regarding the economic milieu. Despite the widely noted and unexpected improve- ment in revenues in 1964-65, it appears that if the Minister still yearns for balance in the traditional budgetary accounts he has very little room for tax cuts in the coming fiscal year. But his tentative glance in the direction of the national accounts budget last year, his further look across the border and his exposure to the fiscal philosophy of the Economic Council and the O.E.C.D. (both urging steps to increase aggregate demand) may lead him to believe that budgetary deficits are not an unmixed evil and may even be the road to the achievement of potential. In this theoretical context the room for tax cuts or new expansionary spending policies is limited only by the fear of infla- tionary pressures and their consequences in terms of internal and external confidence and Canada's com- petitive position in world markets. Balance of payments problems in either Canada or the United States may also be an inhibiting factor in fiscal policy choices. The work of projecting revenue for the coming year was more complicated than usual because of the sub- stantial alterations in provincial abatements, sales tax rate changes in the current year, and the tapering off of the corporation tax payment acceleration. On the expenditure side this was the third year in a row that the Main Estimates for the coming year have not been available at forecasting time due to alterations in the Parliamentary routine. As a consequence the shape of the 1965-66 programs can only be guessed at in the light of past experience, government announcements and legislation on the order paper. Even the current year's outcome remains more of a mystery than usual because no Supplementary Estimates have been tabled since November. For these reasons our projections should be regarded as tentative figures only. For the current year they indicate that despite a record breaking increase in revenue of nearly $900 million, the government will still end up with a deficit on budgetary accounts, but a much smaller one than the $455 million originally predicted by the Minister. It is not likely the record revenue increase will come close to being matched in the coming year. Assuming no change in tax rates beyond additional provincial abatements already promised, and with anticipated GNP growth in excess of 6%, the government can expect a revenue increase of only a little over $200 million. Expenditures in 1965-66 are estimated to rise by more than this amount, so a some- what higher deficit is anticipated for the coming year. If expenditures reach the $7.6 billion mark-an increase of about $325 million over the amount forecast for the current year-the budgetary deficit will be about $250 million. If they go to the upper limit envisaged in this prediction-$7.75 billion-the deficit could run to $400 million - about the same as forecast in last year's budget. Tax cuts would, of course, increase the figure except to the extent that they stimulated a greater growth in employment and production. The Old Age Security Fund, which is outside the budgetary accounts, is expected to show a surplus of $170 million in the coming year despite the proposed extension to 69 year olds on January 1, 1966. The Canada Pension Plan Fund will also commence opera- tion on that date but it too will be outside the budgetary accounts. It will show a surplus in the first year as the only disbursement will be for administrative purposes. Indications are that the government's overall cash needs will be slightly higher than in the current fiscal year. A more detailed analysis follows. Additional copies of the Memo may be obtained at a price of 25¢. © 1965 Canadian Tax Foundation TAX FOUNDATION CANADIAN

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