With an election only six months away the federal government was not going to leave all the vote-enhancing tidbits to just one day and so most of what we learned from Tuesday’s budget had already leaked out in the days and weeks leading up to the big day. From relaxing minimum RRIF payment thresholds, to increasing the maximum annual TFSA contribution limit to $10,000, to a 2% reduction in the small business tax rate, the initiatives in the budget will not have a major stimulative effect on the economy. They will create enough tax relief for a broad segment of the population so that folks will feel better. Any of the significant spending measures (military, national security, infrastructure, etc) are sufficiently back-end loaded as to not have a huge impact on the current fiscal situation. That doesn’t mean there is a lot of wiggle room in this budget.
As important as pre-election promises are, sticking to the ones made in the previous election are even more critical. Therefore, it was not feasible for the government to release a budget that did not show the fiscal 2015 budget balanced and that’s what was delivered. The problem is that it took some fairly special items to get it, including the $3.2 billion sale of the government’s existing GM shares and more than $2 billion from the wireless bandwidth spectrum auction. What is more concerning is that the government sliced into its $3 billion annual contingency reserve and has factored in only a $1 billion reserve for the next three years. If the economy was on rock-solid footings there may be a rationale for not putting so much into the rainy day fund. Yet, the entire reason why this budget was about two months late was because of the uncertainty created by lower oil prices. In the budget speech, the Finance Minister set out the government’s estimate for an average $54/barrel price of oil in 2015 and $67 in 2016. Recent price action would suggest these forecasts are reasonable, but there are also a large number of critics who believe that oil could tumble back down to $40 or lower. I’m not in that camp, but I wouldn’t bet the farm on it not happening either.
As for the personal finance aspects of the budget, again the TFSA contribution boost is a positive although it will no longer be indexed to inflation. I’m split on the lower RRIF rules. Yes, it will help put a lid on non-discretionary incomes for seniors and potentially help with OAS clawback. However, advocates are missing an important consequence and that is what could be an even higher tax grab at estate time should more money be left in the RRIF longer. One positive development for gifting is the capital gains exemption now given to the liquidation of private company shares and real estate if the proceeds are given to a charity.
Click the following link for a PDF copy of ScotiaMcLeod’s detailed budget analysis, including the new RRIF withdrawal payments table.