Thoughts on the Canadian Budget - Part II

Last night I struggled to say anything at all about the Canadian budget. Upon reading today's papers, I believe I should have given more serious thought about a new tax-free savings account that was introduced in the Budget. James Daw of the Toronto Star explains how it works:

Savers will not enjoy a refund of tax on income they deposit to their tax-free accounts, and they will be limited to saving $5,000 a year, with periodic adjustments to keep pace with rising prices and incomes.

But the savers will never pay taxes on their investment income, or see federal government pensions or tax credits clawed back when they make withdrawals. This will allow savings to grow faster and go further in world of low interest rates.

The idea behind this plan is simple - to give incentives to Canadians that currently are not saving to save for the future.

The big question is, "How sensitive are non-savers to changes in investment tax rates?" If they are sensitive, then this plan will work as intended. If they are not sensitive to changes in tax rates, all this plan does is lower the tax rates of people who were saving anyway. Then, in reality, it is not a whole deal different than a stimulus package that just gives everyone a rebate check. Except this rebate check would only go to people who could afford to save for the future. A regressive stimulus package anyone?

So will it cause non-savers to save? I don't believe it will. Neither does Derek Holt; from the above Star article:

"The proposal is more about optics than substantial tax savings," says Royal Bank of Canada economist Derek Holt, noting the government will have limited room to cut taxes or repay debt. "And it's not clear it's going to encourage additional savings."

Those who have taxable accounts today may simply convert them to tax-free accounts. The government expects half of tax savings to go to seniors, who have the most savings in unregistered accounts and who must start to take withdrawals from their retirement plans once they turn 71.

Odds and Ends 1:

In response to yesterday's discussion of the budget, Gabriel Mihalache asks:

Are those percentages real or nominal? Or is inflation in Canada so low that it doesn’t matter?

They're nominal. Inflation in Canada is typically around 2%, as the Bank of Canada is mandated to keep inflation between 1-3%.

Due to population growth, to keep real per-capita spending level, nominal government spending needs to increase by about 3% a year.

Odds and Ends 2:

Marginal Revolution on my economic weight-loss plan.