The federal deficit is 'on track' — but to where? -

The federal deficit is ‘on track’ — but to where?

Stephen Gordon on why Budget 2014 promises to be interesting


Adrian Wyld/CP

The Department of Finance released the June Fiscal Monitor last week. The accumulated deficit for the first three months of fiscal year 2013-14 was $2.5 billion, just under the $2.8 billion deficit for the first three months of 2012-13:

The financial results for the first three months of the fiscal year provide limited information with respect to the outlook for the year as a whole. That being said, the financial results for the April to June 2013 period and recent economic developments suggest that the fiscal projection presented in Economic Action Plan 2013 is on track.

This is true, insofar as the first three months of the first year in the three-year horizon of the 2013 budget goes. The current projection is for the deficit to fall from $25.9 billion in 2012-13 to $18.7 billion this year. But this apparent $7.2 billion reduction in the deficit overstates the actual progress that is expected to be made this year. The accumulated 12-month deficit reported in March 2013, the last month of 2012-2013, was $18.3 billion. The difference between that and the $25.9 billion total deficit projected in the budget is made up by one-time charges, such as increases in liabilities for AECL’s cleanup program. So when Finance projects $18.7 billion deficit for this year, it is essentially saying that 2013-14 will come in close to 2012-13, but without those one-time charges.

The government laid out its budget-balancing strategy in 2010 and hasn’t since made any significant changes to it. Briefly put, that strategy is to peg the rate of spending on transfers to provinces and to persons to the rate of GDP growth, hold program spending constant and let economic growth provide the revenues needed to balance the budget. The arithmetic behind this strategy is perfectly sound and it will eliminate the deficit — eventually. But the chances that it will do so in time for the government’s self-imposed deadline of 2015-16 are rapidly diminishing.

If the deficit is “close enough” to zero by 2015, it will be a simple matter of combining optimistic projections and shifting some expenditures and revenues from one year to another to come up with a balanced budget projection for 2015-16. It will be the task of Budget 2014 to get public finances in such a position by 2015 — and it seems increasingly unlikely that staying the current course will achieve that goal. A change of direction may be in store for next year’s budget.


The federal deficit is ‘on track’ — but to where?

  1. I can think of one way the deficit can be reduced by $10 billion in one fell swoop: Eliminate equalization payments to Quebec. Why not? The Charter of Hatred the Quebec government is proposing seriously goes against Canadian values of pluralism and a recent poll showed 57% of Quebeckers support the Charter. To Quebec, Canada, not matter what political party is governing, sees Canada as its ATM. Enough is enough!

    • I can think of one way the deficit was created in one fell swoop: Unproductive corporate tax cuts.

      • You’ve made the assumption that corporate tax rates and revenues form a linear relationship. That is to say, a reduction in corporate tax rates by x percentage results in a loss of corporate tax revenue by y dollars.

        Stephen Gordon’s previous analyses on this topic shows that there is not even necessarily a relationship at all between rates and revenues (see link below). I would like you to prove to me that reducing the corporate tax rate resulted in less revenue. This would be easy to do with the GST reduction, but you’ve specifically said the deficit is due to reduced corporate tax rates.

        • I think you [and by extension SG] are missing toby’s larger point – the cuts are unproductive. As far as i could tell from the link[much of it over my head] there’s little evidence that further reducing CIT rates will increase tax revenues, even if you accept that increasing them beyond a certain point is counter productive. If you continue to reduce rates and it does not produce an increase in tax revenue, the question remains just what are those corps are doing with the foregone tax they no longer have to shift or pass on to consumers? The answer seems to be little or nothing productive.
          They don’t seem to be investing it, rewarding share holders[ which is any case morally dubious] or creating jobs…so what is it for?
          Some allege they are using the money to mend holes in their balance sheets brought about by the recent recession – maybe? Nice if true, doubtful if they should be getting a public subsidy to do so, unless there’s a real case to be made that further job losses are unavoidable otherwise. Even then you risk the wrath of Coyne.:)
          And maybe it’s still going into executive pay that is not merit worthy, new toys for the boys, a new marble counter top for the office, sauna on the mezzanine, a spare jag for the car pool? Who knows? No one tells us proles anything.

          I for one am very skeptical of the idea that the closer the CIT gets to ground zero the better off we all are. Mr G has made a good case for not going back up, he hasn’t made the case for continuing to go down.

          • And, er, there are dozens(!) of economists who do not agree
            with the MacLean’s/ G&M/ Calgary gang about a lot of things.
            I understand it’s allowed.

          • I keep forgetting economics is a priesthood, an avocation, not a science.

          • Do they all work for labour unions or explicitly socialist think tanks? I don’t blame them in that case for knowing where their bread is buttered.

  2. we could get abillion easy just make the CBC a true Public Broadcasting System and have the public support it and watch the trough empty overnight

    • We all know this was exactly the game. Create a deficit, then use it as a pretext to cut spending on politically vexatious (for conservatives) programs as part of an artificial timetable to balance the budget. Of course that timetable also is a political carrot on a stick for further tax cuts to create a deficit once more. Rinse and repeat.

  3. Cons and their ridiculous economics.

  4. I am unimpressed. I do not see anything resembling meaningful cuts int he role of gov’t, and we will continue to see ~ half of our earnings taxed away by the varied and many levels of gigantic gov’t we’ve got.

    We need a determined dictator to slash gov’t dramatically. Thought we might get that with Harper…but nooooo.

  5. The government needs to be more creative. Charge Telus/Bell/Rogers a system access fee, like they use to do to us.

  6. I still don’t see what the big deal is with the deficit being zero. So long as we keep the deficit less than Nominal GDP Growth (which it already is) we are effectively reducing the debt over time, through growth.

    Now that being said, if the deficit can be zero, and if we CAN run a surplus, then of course this is great. But to cut cut cut, or raise taxes, just to get to budgetary balance, when we are effectively already in a position where the Debt to GDP ratio shrinks every year, is counterproductive. It would only be done if we were chasing a political target, not an economic one…. but I suppose that’s reality in political Ottawa.