Tuesday, February 26, 2008

Flaherty's budget is a snorer.

I agree with Chet. Flaherty's budget is flat. It's also dangerously close to a deficit on the surface and may actually be one now. As was previously pointed out here, Flaherty has been playing with the numbers, noting that selling Crown real-estate and then leasing it back shows revenue in one year and then a 25 year long commitment which is a contingent liability.

Given that Flaherty feels there is a need to further pay down the federal debt, he's given himself next to no wiggle room. If his revenue assumptions fall short, even by a hair's breadth, he's put the country into a deficit position.

The one thing Flaherty seems to be making something of a big deal over is his introduction of a Tax Free Savings Account. It's not a bad idea, but it's hardly worth cheering over.

It is after-tax savings. The contributions, to a limit of $5000 annually, are not tax deferred as for a Registered Retirement Savings Plan. Only the interest on the investment is tax-free. Given the same amount of money placed in RRSP, tax deferred until withdrawn, the RRSP actually makes more money. If you scroll down to the comparison to other investment vehicles in the budget document, the actual funds remaining after taxes is identical. However, most people expect to have a reduced income when they start drawing RRSPs which would mean that the tax advantage is with the RRSP.

There's another issue. How many people actually have $5000 kicking around to store in one of these TFSAs? Most people don't make the maximum allowable RRSP contribution. Unless you have the ability to bank and save that amount of money, this becomes a savings vehicle for a limited number of people and certainly not low-wage earners.

If you were thinking of borrowing some money, banking it in a TFSA and then deducting the loan interest on income taxes, that has been covered too. It's not allowed.

Oh yes, it doesn't start until after 2008. As I said, it's not a bad idea, but it remains to be seen how many Canadians will be able to take advantage of it.

If you have been claiming non-prescription vitamins as a medical expense on your income taxes (and have been in a tugging match with Canada Revenue Agency) you can stop doing it, even if you won a court case on the issue. Despite the argument that taking vitamins reduces your dependency on the medical system, Flaherty is having none of it.
Budget 2008 therefore proposes to clarify the wording for eligible drugs and medications to ensure that those that may be purchased without a prescription remain ineligible.

Overall, Flaherty has taken the federal government right to the horizon of a deficit without a buffer and without a rainy day fund.

The real problem, of course, is that Flaherty cannot be trusted. When a member of the Ontario government he lied and deliberately hid a $6 billion deficit.

So don't let this thing put you to sleep. Given Flaherty's track record, there's a good chance we'll be facing a significant deficit before he ever gets a chance to produce another one.

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