Canadian Space Sector Faces New Reality Post Budget

©SpaceRef

Budget 2012

It should not have come as a surprise, after all everyone had been warned for months that the budget would see cuts. The fact that the government is spinning the cuts as "savings" still doesn't change the facts, this budget is a tough one for many and in particular the space sector.

Last year we were told that the government would need to cut around $4 billion in the upcoming budget. Just weeks before the budget that number had grown to between $6-$8 billion depending on which media outlet you listened to. Then budget day, the "savings" came in at $5.2 billion. There was a sense of relief echoed by many media outlets. It's not so bad. But hold on a second, think about it. Last year we were told around $4 billion. The actually number is now $5.2 billion. That's a 30% increase in cuts over what we had originally been told to expect. And for the space sector the pain isn't being felt as much this year, next year onward it's going to be much worse.

There is no doubt that the budget contains savings. Efficiencies are to be found, wasteful spending trimmed etc. But make no mistake about it, the "savings" in this budget are not just savings but rather cuts and for at least the Canadian Space Agency, significant cuts.

The space sector needs to deal with several new realities.

1. The Canadian Space Agency (CSA) budget is being cut 2.5% this year ($7.9 million), $24.7 million next year and with what Industry Canada informs SpaceRef as a permanent savings of $29.5 the following year onward.

2. Other federal agencies including the Department of National Defence will see cuts that could affect their space related programs.

3. The Scientific Research and Experimental Development (SR&ED) tax credit is undergoing changes, some which will be implemented now, others to come. The bottom line, less tax credit opportunities for business. Hardest hit will be small businesses and those interested in entering the sector.

4. Continued uncertainty. The space sector faces the prospect of continued uncertainty as the Aerospace Review continues its mandate. With a report due in mid-December it's anyone's guess what recommendations will come from it and how the government will react.

The government has made it clear with this budget, that savings notwithstanding, changes in how government supports various sectors is changing. The philosophy of less central government, more self-reliance is becoming evident and goes to the heart of the Conservative government.

So what does the budget mean for Canada's space agency?

It should be noted that questions asked of the CSA related to the budget were not answered by the CSA but rather redirected and answered by Industry Canada which oversees the CSA. Officially the CSA is saying nothing with respect to the budget.

In part, it means the government continues its stand of not buying into the Long Term Space Plan that was put together by the CSA. It also means that government has also not bought into the philosophy that major projects put forth by the CSA are part of Canada's national infrastructural assets.

For a government who has talked so much about protecting and helping Canada's north this seems puzzling. A key project related to the north, the Polar Communications and Weather satellite mission remains a paper study and the RADARSAT Constellation Mission, vital to Canada's national interests is moving in slow motion.

More immediately for the CSA, the budget means it has less money to work with and permanent job losses. How many jobs will be cut at the CSA is something being determined right now. Ironically due to the stimulus funding and other projects the CSA budget will have peaked this past year to its highest level ever at $443 million spent. For the current year the CSA budget goes down to $363.2 and next year, based on last years estimate and the current cut, the budget should be approximately $292.8 million. It's too early to say what the budget will look like beyond next year.

A key report issued every year by the CSA at the end of March is the Report on Plans and Priorities. The report outlines the CSA's plans and spending for the upcoming year and provides some estimates for the following year. That report has yet to be released in light of the budget. This comes as no surprise as it was known it would be delayed. Industry Canada informed SpaceRef that the initial report is expected to be tabled in May. However it will not include "results of the Government's review of departmental spending", meaning the cuts. In fact, a source within the CSA has told SpaceRef that the report will need to be completely rewritten and may not be available with all the facts and figures until the fall. This of course will just compound the uncertainty surrounding the CSA planned spending going forward.

So what does the budget mean for Industry?

In a word, being used over and over again, uncertainty.

The day after the budget, MacDonald, Dettwiler and Associates Ltd. (MDA) took the extraordinary step of issuing a press release commenting on one specific aspect of the budget related to the CSA. As the prime contractor of the RADARSAT Constellation Mission (RCM), MDA is working on the design phase which is coming to an end this August. With no clear build phase contracted at this point, MDA stated that with the uncertainty moving forward it was going to take "steps to restructure its work force related to this event", meaning moving people laterally in the company and laying off others.

If the biggest current space project is facing such uncertainty what does it mean for the rest of the business sector?

According to one industry source commenting on the CSA budget cut, "the buying power of the Agency (CSA) has therefore been significantly reduced compared to the late '90s, by more than 50%". The source also commented that with ongoing protectionism in the space sector related to export markets "it is also important that we explain how domestic programs are so critical in providing the tools needed to generate successful exports".

The pressure on the Aerospace Review seems to have escalated after the budget. The recommendations put forward by the review, which the government has no obligation to implement, could have a significant impact on the sector going forward.

The head of the Aerospace Review, David Emerson, is expected to be at the National Space Symposium next week in Colorado Springs "making the rounds" to get a sense of what's happening in the U.S. The symposium is a large, if not the largest annual space sector conference in the U.S. attracting some 9,000 attendees according to the host, the Space Foundation.

For businesses, the upcoming changes to the Scientific Research and Experimental Development (SR&ED) tax credit means recovering less money from investments when it comes time to do taxes.

One immediate change the government is proposing is to reduce the general 20-per-cent SR&ED investment tax credit rate applicable to SR&ED qualified expenditure pool balances at the end of a taxation year to 15 per cent.

Another change with one industry source commenting was "significant" was the changes to Capital Expenditures. The proposed change would exclude expenditures of capital nature.

These changes along with other changes and more changes to come have alarmed industry, especially small businesses.

The government for its part is saying that along with changes to SR&ED it's going to shift resources from indirect support to direct forms of support. $1.1 billion will be allocated over 5 years for direct research and development (R&D) and $500 million for venture capital through the private sector and the Business Development Bank.

For some people including Liberal opposition leader Bob Rae this is a step backwards. With less money for companies to use through programs like the SR&ED tax credit to help them bring their ideas to market, the government will "pick and choose" what projects to fund through the new direct forms of support including new grants.

The post budget analysis is far from over. The months ahead will see how many jobs get cut at the CSA and how industry reacts. The 2012-13 CSA Report on Plans and Priorities, when it is released in full, will at least show the way forward for the CSA with its planned spending in the short term. But with the Aerospace Review underway there appears to be no reason for the government to make any moves until it concludes. At that point perhaps the uncertainty which is so prevalent today will be less so, for now though, uncertainty is the industry buzzword of the times.

UPDATE: According to this press release on Marketwire issued by the Professionals Serving Canadians (PSC), which is a coalition of six concerned public service unions, the Canadian Space Agency will have 23 people notified this week that their position is being cut.

UPDATE: The Public Service Alliance of Canada is reporting an additional 7 layoffs to the CSA on top of what the Professionals Serving Canadians is reporting.