The return of the federal structural deficit? -

The return of the federal structural deficit?

Even the Department of Finance’s own figures suggest the red ink is here to stay


Keen observers of the evolution of the federal budget balance will recall the back-and-forth a couple of years ago about whether or not the federal government was running a ‘structural deficit’. We should be able—in principle—to break down the government budget balance into two components: what it would be if the economy were running normally plus the deviation induced by the business cycle. During a recession, the business cycle contribution would be negative, and we’d expect to run deficits even if public finances were on solid footing. But if the government were running a structural deficit, then the books won’t balance even after the economy recovers.

It seems reasonably clear now that the Conservatives created a structural deficit when they cut the GST, and the federal government admitted as much in last year’s release of the Fiscal Reference Tables. (It had already done so implicitly in the 2011 budget.) The cuts in the last few budget cycles have been designed to offset the revenue losses from those two GST points, and most observers seem to agree that these measures will eventually eliminate the deficit—although perhaps not in time for the government’s self-imposed deadline of 2015-16.

But a dissenting voice has risen up to challenge that consensus, and the dissent is even more startling when you consider the source: the Department of Finance. This year’s update of the Fiscal Reference Tables provides updated estimates for the ‘cyclically-adjusted budget balance’ (CABB), which is an estimate of what the balance would look like if the economy were running at its potential. The new estimates  suggest a structural deficit that has actually widened over the past two years, notwithstanding the cuts in spending.

Here is a chart comparing Finance’s estimates with the most recent estimates of the CABB calculated by the Parliamentary Budget Office. Last year, the two sets of estimates lined up fairly closely, even though they were derived from very different methodologies (among other things, Finance uses GDP to scale its estimates, while the PBO uses Gross Domestic Income). But this year, they look quite different:

The PBO sees a steadily shrinking structural deficit, but Finance sees one that hasn’t changed much over the last three years.

This raises any number of questions, including:

  1. Why are the two sets of estimates so different? Some of the difference may be due to purely technical issues. There are a lot of data redefinitions that are going on: Statistics Canada has changed the way they calculate national accounts, and the Department of Finance has – yet again – changed its accounting rules. Both sets of estimates will likely be revised again after things settle down.
  2. If Finance thinks that it’s running a $15 billion/year structural deficit, how does it plan to balance its budget in the next two or three years?


The return of the federal structural deficit?

  1. Ahh yes, Dear Leader and his ‘brilliant’ economic moves….no wonder Flaherty’s crying.

    Cons are going to leave this country in the same financial mess they left Ontario.

    • Yeah, Flaherty was finance minister in ON. Back in 2003, he said a $5.6B deficit was a “balanced budget.” I wonder how much he’ll be off this time? Given he cut taxes by $44.4B/yr, I wouldn’t be surprised if it was south of $20B (unless the Harper Government has a hidden orchard of money tree growing somewhere…)

      • Yeah, we’re still trying to recover from that little mess he left behind… gonna take years, and right now we have the manufacturing drop to compensate for.

        • As compared to the current province of Ontario projected budget deficit for 2012-13.

          From the Huffpost August of this year- The province is on track to record a $9.8-billion deficit for fiscal year 2012-2013.

          • So now we’re comparing apples to recessions?

          • I have no idea what s/he is doing

          • Your first four words were the truest you have burped up here in years.

          • Sorry, I don’t talk to hotdoggers from the Galt Gang. You guys need to grow up first.

          • You really are uneducated if you can’t tell an anarchist from a libertarian. Or you are lazy, like most spammers.

          • Here’s a thought…nobody cares about either the Black Bloc or the Galt gang.

            The topic here is the structural deficit.

          • The only deficit you need to address is between your ears.

          • Good morning. Lovely day. Looks like it’s going to be a good week.

          • Well, someone must have gotten their pipes snaked over the weekend to be this cheerful.
            It’s gloomy, raining, windy and I’m sure it just hailed on me. Next it’ll be raining grasshoppers.
            Either the plumber was in for a visit or you drink heavily on Monday mornings.
            hmmmm… that last one is actually looking pretty good right now.

          • LOL it’s 7C and sunny here on the South Coast.

          • Good on ya to stay there. Weather here is crap, our mayor is a crack smoking drunk and according to half a news cast I caught at 4 a.m. on my way home from work, we are missing yet another million that the Liberal gov can’t account for. But, are happy to replace by taking another million from taxpayers.
            Now, I’m no math genius, but ….

          • Well I’m pretty sure you’re old enough to recognize that this is the same political hype you’ve heard all your life.

            I’m pretty sure you’re old enough to know Hudak’s platform hasn’t a chance either.

          • Age wise maybe not as much as others, but in reality time, absolutely. Hudak had a platform in my lil ole town a couple years ago which has completely changed now.
            I won’t support him, but will be completely honest in the fact that I’m up in the air about who to support and why I should support any of them.

          • Well, in one way it doesn’t matter who you support. Once they get in there none of them can do what they promise anyway.

            Anyone can cut spending. Anyone can spend more. It’s all window-dressing for votes.

            But reality curbs both promises. Cutting and spending both carry risks….and you have to steer down the middle as much as possible.

            And in any case….they’ll be tossed after 2 terms, sometimes 3……and most of the things they did will be changed back anyway.

            Spenders will be replaced by cutters, and cutters will be replaced by spenders……the rest is political theatre.

            The trick is not to be a one-issue voter….and to watch where the country is going overall.

      • And the current Liberal government is running a $9.8 Billion dollar deficit. It’s obvious to anybody who can do basic arithmetic who’s responsible for the mess Ontario’s in today…. they can also thank the previous federal Liberal administration for helping it come to what it was thanks to the Liberals offloading of costs to the provinces.

        • You do realize that Harper and reform were calling for deeper cuts from Chretien and Martin during the 90s? Course you weren’t.

      • Looks like Clement will have to open the car’s trunk to help out.

    • Remember when we were promised that there would be no deficit before those who believed that voted Harper and Flaherty in?
      Ah those were good times hey?

      • Yup, and Harp spent like there was no tomorrow blowing the surplus on crap….and then the rainy day came along.

        6 years later….Harp is clutching at straws….wet straws….

  2. The Harper gov’t has floated the idea of balanced budget legislation. As I understand it, the legislation will mandate that one can neither run surpluses nor deficits. Does this mean they plan to ignore the impacts of the business cycle on revenues and expenses?

    • Given the fiscal mess Harper has created with reckless and useless boutique tax cuts, it’s rich for him to propose a balanced budget bill. Of course, sheer hypocrisy is par for the course with this bunch of fanatics.

      • Meanwhile the Liberals and NDP both supported running even larger deficits. So you can say what you will about the current regime, but it’s a known fact that we’d be worse off if any of the other parties had been running the show.

        • Nonsense. Harper has wasted tens of billions a year on boutique tax cuts that do nothing for the economy. He has cut taxes by $44.4B/yr.

          Imagine if the NDP increased social spending by that much? The cons would howl in indignation.

          Of course, increasing social and infrastructure spending creates jobs and boosts GDP — and tax revenues. Harper is killing jobs and GDP with big spending cuts that are depressing the economy. That will lower tax revenues creating a bigger deficit burden.

          Let’s face the facts: our economy was doing much better under the Liberals and we had big budget surpluses. Harper has laid all that progress to waste.

          • There was also a little world-wide recession in 2008 that might have had an effect as well Mr Waller.

        • BWAAAA! – a known fact. Do you have reference for this – I’d like to verify it. I assume it’s at your finger tips.

          • It only has to be known by him to be completely kosher.

  3. Another chart showing governments of the right spend more than they earn. So what else is new? When will evidence ever change them?

    • Government’s done “earn” anything. They tax people.

      As for governments of the left, they’ve left us with 95% of the debt the country now has. The Liberals managed to run a “balanced budget” for a few years only because they off-loaded all of their expenses to the provinces.

      Is that what you advocate the federal government do? Balance it’s own budgets on the backs of the provinces?

      • “Government’s done “earn” anything. They tax people.”

        I’se jus done offering’ a ‘xample like the household budget-like arguments… sorry fer bein’ so colloquial an’ all…

        • So, for one misplaced character in one word you feel comfortable insinuating that he is idiot. Another revealing example of the “tolerant” left

          • Rick knows how to type. It’s his job.

          • Do you think so? Surely the pmo can afford better?

          • Actually having interacted with Ricky on numerous occasions, it is as a result of months of listening to him whipping stuff out of his butt that everyone who has read his outpourings form the conclusion that he is an idiot.

        • You can’t refute my point, so you point out a typo? That’s the best you can do? What a fine example of how intelligent you are.

          • “Your dogmatic rant doesn’t speak to the evidence, or Mr Gordon’s argument, and only confirms mine.”

      • Anyway, Your dogmatic rant doesn’t speak to the evidence, or Mr Gordon’s argument, and only confirms mine.

      • “As for governments of the left, they’ve left us with 95% of the debt the country now has.”

        Can you back that up?

        • Of course not.

      • Pssst… Rick… Muroney took Trudeau’s debt and ran with it, driving it up sky-high. The Chretien government brought it back under control. Harper took that and blew it to bits. So apparently you can’t tell your right from your left.

      • They’re doing it now.

  4. Questions need answers…the meddlesome Mr P is no longer running the PBO, conveniently enough. Just say’ n. Another leak in the dam successfully plugged for now?

    • Harper managed to install another watch guppy…

  5. If the Conservatives balance the budget by 2015 (or cook the books, given the level of government secrecy,) they just plan on blowing it all again on more social-con boutique tax cuts: namely, income-splitting and doubling the TFSA (tax haven for the rich.)

    So far the Cons have cut taxes by $44.4B/yr according to their 2009 budget estimate. Now they are making huge spending cuts trying to make up for it (like cutting the Canada Health Transfer in half.) These spending cuts are depressing the economy and putting it back towards recession. And what’s worse is that instead of targeting economic performance with tax cuts, they are targeting votes. So Harper is, in effect, pouring tens of billions of dollars — a year — down the drain on nonsense.

    The Liberals should promise to eliminate these worthless boutique tax cuts and with the savings cut income taxes for the working class and middle class. Not only would that be appealing to voters and economists, it would turn the economy around. Right now it’s going down the tubes under Harper’s reckless incompetence.

    • Stop lying. Nobodies cut the Canada Health Transfer in half. It’s increased every year under this government, and they’ve promised to continue increasing it in future years.

      • Paul Martin brought in the Canada Health Transfer: 6% increase over 10 years. Harper cut this to 3%. Fact is, due to more people retiring, health care costs will increase at 4.9% a year. So Harper is downloading huge costs onto the provinces:

        “But Canada’s premiers warned last year in a report the new federal health accord will gut nearly $36 billion in funding to the provinces over the 10-year deal and will erode public health services to all Canadians.”

        National Post: Ottawa’s overhaul of health-care funding has left enormous ‘fiscal gap’ for provinces, PBO warns

      • Actually for once Rick is spot on
        Nobodies have cut the CHT, Nobodies like Flaherty, Harper etc.

  6. So am I seeing a massive groundswell of support for increasing the GSt to 7% here?

    • LOL are you TRYING to give Cons a heart attack??

      • Pretty sure the LPC and NDP are just as terrified by the idea.

        • Only for vote-getting….the tax wouldn’t bother them

          • They’ve both campaigned on platforms promising to eliminate it.

          • Again….vote getting. The tax itself is necessary.

          • Pardon! They campaigned to eliminate GST…piffle!?!?
            I presume you meant they promised [ LPC anyway] to not restore the 2% cuts. Something they most certainly should be doing imo. Raising or restoring CIT makes no sense to me when you compare the true rates vis a vis the US.[ as i believe you’ve pointed out] Politically of course it’s likely much easier to claim you’re taxing the 1%, which is why the ndp want to go there, which may be smart politics but dumb policy. In that sense the ndp is as bad as Harper and the CPC philistines.

          • My memory is longer than yours, I guess. LPC in 1993, NDP in 1997.

          • No fair going back to the beginning of time like that. But i think one or two things have changed since the days of JCs little red book.

    • I’ll see your GST increase and raise you restoring the corporate tax cuts.

      • I’ll agree with that.

  7. Flaherty left the Ontario budget in shambles, the Federal budget is in shambles. Time to name Flaherty to the Senate, let him moulder with his failed peers.

    • LOL

  8. Hey, for a government that doesn’t even try to explain where it misplaced 3.1 billion dollars, it’s all just a shell game anyway.

    They’d rather we all just talk about their vaunted economic management ability and their endlessly-hyped Economic Action Plan, instead.