THE 2008 MANITOBA BUDGET

Released on April 9, 2008

HIGHLIGHTS

• FY 07-08 surplus estimated at $329 million
• Annual surplus close to $100 million booked for next four fiscal years
• Moderate slowdown in growth anticipated
• Tax cuts for manufacturers brought forward
• Spending increase of 3.3% in FY 08-09
• Debt burden continuing to trend down

With $329 million in projected black ink for fiscal 2007-08, Manitoba is on track to record its fourth consecutive surplus, on a summary reporting basis. Manitoba’s economy outpaced the nation as a whole in 2007, experiencing solid economic growth estimated at 3%. And while Manitoba’s economy is expected to hold up better than most of its eastern and central Canadian counterparts in 2008, the Manitoba government has assumed that its economy will not buck the trend towards slower GDP growth. As such, the approach for this budget is correspondingly incremental and prudent, rather than groundbreaking, with many of the tax-relief measures representing instalments of multi-year plans announced in earlier budgets.

That said, a few revenue and spending initiatives of interest were nonetheless present in this year’s budget. Capital tax relief was brought forward for manufacturers and processors, which will see their capital tax eliminated by July of this year. While not as needy as the manufacturing sector in central Canada, this accelerated tax relief will certainly help cushion Manitoba’s manufacturers against the risk of a more dramatic slowdown in activity.

Total newly announced tax relief for businesses is slated to cost the treasury an additional $31 million in foregone revenue. Individuals will see mild and incremental tax relief worth $33 million, the bulk of which ($25 million) is for homeowners through an increase in the education property tax credit. The province will also move in lockstep with federal measures on tax-free savings account and the extension of the accelerated capital cost allowance (CCA) for manufacturers.

With the balanced budget requirement having been met in FY 07-08, the government was able to confirm previously-announced tax cuts for FY 08-09, most notably a reduction in the general corporate income tax (CIT) rate from 14% to 13% and small business tax rate from 3% to 2% (both effective July 1, 2008). With further budget surpluses in the order of $92-$146 million planned over the next few years, previously announced further reductions – by another full percentage point – in both the CIT and small business income tax rate look all that more likely to be confirmed in 2009. Furthermore, the province’s already-well-contained debt burden is set to head slightly lower as a share of GDP.

Surplus of $329 million in FY 07-08

Budget 2008 is the government’s second under the new accounting framework that presents a more comprehensive view of the province’s finances. The so-called “summary” approach adds on to core government operations the activities of other government business enterprises (GBEs), regional health authorities, hospitals, colleges, universities and school divisions in the province. When compared to last year’s budget, the government has estimated an income tax windfall of $210 million, supported by stronger than expected employment and economic growth. Total revenue is estimated to be $504 million higher than budgeted. This improved revenue showing was partially offset by higher-than-budgeted expenditures, as pressures emerged in a number of areas, including health care, education, justice, agricultural assistance and community support. All told, expenditures should eat up $350 million more than budgeted. This translates into a bottom line improvement of $154 million for the fiscal 2007-08 surplus.

The government’s summary reporting shows healthy government budget surpluses over the next few years. In real terms, Manitoba’s economy is expected to advance at a respectable clip of 2.7% in 2008, just shy of last year’s estimated turnout of 3%. Although the economy will not be immune from some of the headwinds blowing up from the U.S., the economy in Manitoba is diverse and well-positioned to weather the hit reasonably well. The government’s 2008 real GDP growth forecast is somewhat higher than that of TD Economics (just over 2%). However, the more important indicator is nominal GDP (i.e., including the impact of domestic and export price changes), since that determines growth in the tax base. And on that front, we can hardly quibble with the government’s relatively conservative estimate of a still-decent 4.5% advance, compared to last year’s robust estimated 7% gain. In addition to other factors, this slowdown builds in the likelihood of a pull-back in commodity prices, which will lead to an easing in nominal exports.

In addition to moderate growth in the economy, the revenue side will benefit from already-announced changes to the federal equalization formula in last year’s budget. The main source of increased revenue for fiscal 2008-09 is federal transfers, which will provide an additional $314 million when factoring in equalization and health and social transfers. On the flip side, a number of revenue initiatives that were announced today or those previously announced will constrain revenue growth to 1.3% in fiscal 2008-09 and below that of nominal GDP over the next few years. On the spending side, a jump in health expenditures of 5.2% will lead the overall tally increase of 3.3%. Other priority areas such as education and infrastructure will also see a boost.

Recall that under the government’s balanced budget legislation, the government must balance its books after its annual commitment of $110 million towards the debt retirement fund by drawing from its Fiscal Sustainability Fund (FSF) – a rainy-day fund set up to cover unexpected events. In order to meet the conditions of the legislation, a $60 million withdrawal was made from the FSF, leaving the balance in the fund at an estimated $643 million.

Summary of measures

Taxpayers will face small fee increases on things like vehicle registrations and fishing licenses, projected to bring in an additional $9.6 million in the coffers. A new tax on coal of $10 per tonne of carbon dioxide emission would also be introduced in 2011, with the intent of raising it up to $30 per tonne in future years.

Otherwise, the government continued to move along its tax relief agenda of previous budgets, albeit in incremental fashion. Total newly announced tax relief is measured at $63.8 million, split almost evenly between individuals and businesses. Salient measures, effective January 1, 2009 include: