About those surpluses everyone wants to spend

Without further austerity, they disappear quickly

by Stephen Gordon

Justin Tang/CP

Justin Tang/CP

The 2014 budget projects surpluses for the years 2015-16 and beyond, and these surpluses are establishing themselves as the context for the next election. All parties are toying with ideas for disposing of those surpluses: some combination of tax cuts or increased spending. But before accepting these projections as the baseline for developing their election platforms for 2015, the opposition parties should take into account the assumptions made in the 2014 budget.

In particular, they should look at the projections for government spending. Program expenditures (expressed as a share of GDP) are set to decline over the budget’s projection horizon:

Chart1

Breaking down the expenditure side shows where those cuts are expected to be made:

Chart2

Regular Econowatch readers will recognize this pattern: the budget projections incorporate the Conservatives’ “starve the beast” strategy for reducing the size of the federal government. Implementing this strategy involves letting transfer payments to individuals (elderly benefits, child benefits and EI) and transfers to the provinces increase with the size of the economy, while keeping nominal expenditures on direct program spending roughly constant. This tactic forces a program of continued austerity on government operations as the economy grows and as costs rise. The 2014 budget is even more aggressive; it actually cuts direct program spending by $5 billion this year.

Although the opposition parties have been fiercely critical of this austerity program, I don’t recall seeing any firm commitments to reverse a significant number of these measures. Even if they don’t reverse the cuts that have been made, the more pressing question is whether or not the Liberals and NDP would keep in place the austerity measures that the Conservatives have planned for the future.

For example, suppose that the federal government stabilized direct program spending at its projected share of GDP for 2014-15—that is, after the cuts set out in the 2014 budget. (This doesn’t mean that previous cuts would be reversed, only that no more new cuts would be made.) Here is what happens to the projected federal government balance:

Chart3

The projected surpluses disappear without those future spending cuts. The small surpluses that remain are largely driven by one-off measures such as asset sales; once they go away, so does the surplus.

So if the Liberals and NDP plan to campaign on platforms that involve new spending measures, they’ll have to make a hard choice. They must choose between the following options:

  • Adopt the Conservatives’ plan for future austerity. In this scenario, these cuts would be required to make room for new spending; total spending as a share of GDP would remain constant.
  • Abandon austerity and increase the necessary taxes required to finance new spending.



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About those surpluses everyone wants to spend

  1. The Cons engage in corrupt “starve the beast” schemes. Then the Liberals enable them by not reversing any of the damage done — like the $44.4B/yr wasted on boutique tax cuts. Together they tear down the “just society” built up in the post-war era.

    If Trudeau forms the government, it will be 1993 all over again. A myriad of promises quickly discarded once coming to power.

    Trudeau must agree with all of Harper’s economic policies. Because he has vowed not to change a single thing about them.

  2. “They must choose between the following options”

    Or, as Mulcair often states, spending priorities could be reorganized

    • That’s option one, translated into politician-speak.

  3. Fair taxes, fair society. Taxes are the price of civilization but there is plenty of scope in how they are raised. They should be evaluated like investments. Is the benefit bestowed by spending the money raised by a particular tax of net benefit to society compared with not raising it. But no party seems to be willing to describe how their policies will be paid for (including the CPC – given that there is a very real “cost” to reducing taxes).

    • Yes the tax system must be restructured so it is more fair and more productive. Over the past 30 years, continuous tax cuts have only benefited the wealthy. Obviously that is a poor use of limited resources (unless you believe in social Darwinism.)

      The NDP should quit pretending they are ever going to get red Tories to vote for them and represent the center and the left. Put the squeeze on the Liberals from the center. The most successful economies are in northern Europe. That’s the model the NDP should sell to Canadians. The Liberals and Cons are taking us down the same “small government” path of self-destruction the Americans have taken. You can’t dig your way out of a hole. The Americans have proved that painfully obvious fact.

      • LOL only at the wealthy ehh..per per-capital earners of 80k a year pay almost 80% of program expenditures. earners under 30k use almost 80% of program costs. the ‘wealthy’ aka the successful hardworking are already supporting the bottom

  4. How do the numbers look if you adjust for business cycle, or is that taken into consideration in the forecast for revenues and expenditures? Are we only seeing the rising tide in those bar charts?

  5. That’s OK, because one of the subtle euphemisms being repeated at the Liberal convention this weekend was “paper deficits”. In other words, if the debt grows at a slower rate than nominal GDP, a deficit isn’t really a deficit at all. In fact, it can be a “surplus”. Problem solved.

  6. It is an absolute necessity for the federal government to “starve the beast” because the provincial governments need the spending and taxing room for health, education, and social spending where demographic aging requires that provincial government tax and spend more.

    The constitution is not going to be rewritten. The provinces have a lot of young people to educate for the competitive world economy, and rapidly aging populations creating funding pressures.

    There is only one taxpayer. The feds have to spend less so the provinces can spend more. We can’t repeat what happened under Chretien and Martin in the nineties when they didn’t restrain their own federal spending as much as they cut transfers to the provinces.

  7. I think there’s a 3rd option Stephen. That would be to abandon the federal austerity measures, and slash transfers to the provinces like the Liberals did in the 90′s.

    That way federal government program spending could continue to increase without increasing federal taxes. Sure, education and healthcare get devastated under such a plan, but something’s gotta budge. The Liberals chose that path in the 90′s, couldn’t they do so again in the future?

    • also a re-statement of the first option

      • It’s something different: a change in scope, from just the federal fisc to federal+provincial fisc.

  8. Or there’s the abandon austerity and not increase taxes option.

    Run with a deficit while global interest rates are at record lows, invest that low-interest money into infrastructure, education, and pollution/CO2 control in order to reap the high-interest rewards of a better educated populace being able to create and develop the technologies the world is going to be using.

    • Is this Justin Trudeau’s “the budget will balance itself” economic theory at work?

      If you borrow money anytime interest rates are low, you’re stuck paying off that debt when interest rates are high. And unfortunately, the ROI on infrastructure, education and pollution control don’t go up just because global interest rates do.

      And you guys wonder why nobody trusts you with the economy? Pfft!

      • You’re only “stuck” if you haven’t managed to use that money to get yourself a higher income.

        And while you’re right, the ROI doesn’t go up because global interest rates do, neither does it get any less costly when they do go up. So if you’re going to invest in it, the best time to do so is when the money is the cheapest.

        Here’s the other interesting thing.. when interest rates are low, it’s because inflation is low. But if inflation is low, it’s a good sign the economy is slow — which is exactly when government’s should invest, to prime the economy

        As the economy picks up speed and interest rates rise, government can then afford to cut programs (because private industry can pick up the slack) and have a higher tax take, thus enabling them to pay off the debt acquired.

        • So if you’re going to invest in it, the best time to do so is when the money is the cheapest

          No, the best time to do it is when you can afford it. Just because there’s a sale on Lamborghini’s, doesn’t mean everyone should go out and buy one.

          • Most people who aren’t morons understand the difference between an investment and an unnecessary purchase.

            Which means I’m not terribly surprised you don’t know the difference between an investment and a Lamborghini.

        • its also called risky economics. should something bad happen out of nowhere you are no longer in a position of strength. you go right back to austerity

      • government securities have fixed returns. The government can raise money at very little cost right now, it makes sense to borrow money now. It’s not popular politically cuz people don’t understand that debt isn’t a bad word. It’s one of the pillars of economic prosperity if used intelligently.

        • No, the government can’t “raise” money at very little cost, it can borrow at low interest rates. The cost of that borrowing is entirely dependent on when that debt is repaid. If that debt were to be repaid next year, yes the cost would be very little. But if it weren’t paid for for 50 years, the cost of that debt would be very high.

          It doesn’t make sense to borrow money now if there’s no need for it. Do you go and borrow money every time the bank offers you money at a good rate, weather you have a need for that money or not? Of course not.

  9. What about Option #4 : decriminalize marijuana and rake in new sales tax revenues?
    And Option #5 : bring back Loto Canada!

  10. Pingback: The Conservatives want to talk about how a budget is balanced - Macleans.ca

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