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

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.