The budget path out of deficit

Stephen Gordon on how a surplus is possible, just in time for the next federal election

Sean Kilpatrick, The Canadian Press

Sean Kilpatrick, The Canadian Press

The Department of Finance’s own estimates for the structural balance in the 2012-13—that is, what it would be even after the economy returned to potential—is a deficit of $15 billion. On the face of it, it is difficult to reconcile a structural deficit of this size with the quick return to surplus projected in the 2014-15 budget. How was the government expecting to engineer a $20-billion swing in its budget balance without making major changes in its fiscal policy stance?

Part of the answer is on the spending side. The government’s strategy laid out in the 2011 budget has been to let transfer payments to individuals and to provinces grow at the same rate as GDP, while holding the line on direct program spending. Since the costs of these programs grows over time, holding spending constant has the effect of gradually eroding the means to deliver the programs. This explains the regular flow of stories of program cuts coming out of Ottawa in the past few years.

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This austerity campaign is being ramped up in 2014-15. Transfer payments to individuals and provinces will continue to grow: there are no reductions planned to programs that send cheques to people and that provide funding to provinces. But direct program spending will fall by $5.7 billion, which works out to a 4.8 per cent reduction. As the budget documents make clear, much of this reduction will achieved by cutting back on public-service benefits.

But these expenditure cuts are not enough to erase a deficit of $16.6 billion; the government is also counting on rapid revenue growth. Revenues are projected to increase from 14.1 per cent of GDP to 14.5 per cent over the medium term. In other words, revenues are expected to grow more quickly than the economy. Nominal GDP is projected to be about $2 trillion, so an increase of 0.4 per cent of GDP works out to $8 billion.

This seems large, especially since there are no new tax measures that would generate revenues of that magnitude. It turns out that most of this increase is generated by personal income tax (PIT) revenues. Since personal taxes are progressive, revenues are very sensitive to increases in GDP. The Department of Finance estimates that a one per cent increase in GDP produces an increase in PIT revenues of about 1.2 or 1.3 per cent. PIT revenues were roughly 7.4 per cent of GDP before the recession; this ratio fell to 6.7 per cent on 2009-10, even though the PIT regime changed little. This ratio has been increasing slowly as the economy recovered, and the projected ratio of 7.3 per cent of GDP is roughly in line with what PIT revenues were before the recession.

Unless there’s a large, negative shock to the economy, the increased austerity and the rebound in personal income tax revenues should be enough to get the government within hailing distance of a balanced budget next year. Federal governments have any number of ways to make marginal adjustments to their budget balance—selling assets, such as its stake in GM, shifting the timing of various transactions—so the Conservatives should be in a position to plausibly announce a surplus in 2015-16 before the next election.




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The budget path out of deficit

  1. This was a somewhat difficult analysis to follow Stephen. After reading it I’m not quite sure if you believe what’s in the budget or not.

  2. Could you explain further please.:
    Is balancing the books for fiscal 2014-2015 (presumably near the peak of a business cycle) the same as eliminating a structural deficit, which would presumably take into consideration the same business cycle?

    • Conservative Bob Plamondon writing in Ottawa Citizen:

      It is the steady downward track on government debt that is the hallmark of this and his recent federal budgets. Indeed, outside of a recession and a temporary dip in revenues, it is unconscionable that the government, on our behalf, would run a structural deficit. The evidence is now clear that within the existing taxation envelope the government has the capacity to balance the books, just as it did before the 2008 economic crisis hit us hard. Those who want to spend more can always do so responsibly, provided they are prepared to increase taxes and take the ensuing political heat.

      http://www.ottawacitizen.com/opinion/op-ed/Flaherty+makes+prudence+virtue/9495893/story.html

  3. There should never have been a deficit in the Harper years, except for just after the deregulation great recession of 2008. Or at least much smaller ones. As a clone of George W (but with less humanity), he inherited a huge budget surplus. As opposed to George W, he also inherited a huge trade budget surplus.

    Mr Harper and Flaherty chose to have a deficit and add over $170 billion to the national debt purely for ideological reasons.

    The amount of revenue lost to the federal treasury for GST/HST was 2% x 6Billion = $12 billion lost revenue.

    The amount of revenue lost to the federal treasury for corporate income tax cuts was 7% x $2.1 – 2.2 billion = just under $15 billion lost revenue

    Having a punish exports reward imports too high dollar policy made the C$ go from .65 US to parity 1.0/.65 = 55% burden to any Canadian company trying to export and rewarding any foreign company for attacking the Canadian market.

    According to studies discussed in Maclean’s Econowatch a few years ago, the Harper government’s punish exporters – reward importers too high dollar policy resulted in a change in direction of trade $100 billion dollars. Between lost jobs and lost corporate income this added another $10 billion in lost revenue to the federal treasury.

    $12B + $15B + $10B = $37B revenue shortfalls and structural deficits because of ideological right wing class war on the working, middle class, the rest of Canadians who are seen as the nuisance 90% by right wing federal and Ontario provincial politicians obsession.

    Mr Flaherty and Mr Harper proactively chose to engage in a policy of Starve the Beast – a right wing invention of creating an economic, financial, and budgetary crisis by implementing revenue shortfalls and misrepresenting them as “tax cuts”.

    By causing this economic and budgetary crisis, right wingers create a pretence for the need to savagely attacking government outlays. As a bonus, by savagely attacking government outlays, right wingers wait for underfunding to destroy operational effectiveness and efficiency of government operations.
    After destroying governments’ ability to be operationally efficient and effective through underfunding, right wingers then start the drum beat to privatize government operations to their wealthy friends under the pretence “that government can’t do anything right and we need private sector efficiency to save the taxpayer money”
    Once government operations are privatized, they are no longer reviewable by the auditor general. Without review and with more money funnelled upwards towards the 1%, right wingers reward their friends secure in the knowledge that their rich friends will fund right wing politicians, right wing propagandist (non) think tanks, and buy up media properties to reinforce the oligarchs and plutocrats wealth and power and ensure the continued electoral victory of the right wing policies of the puppet parties of the 1% and multinational corporate bosses.
    That is the right wing strategy of Starve the Beast bragged about by the political operatives in the Reagan and George W presidencies.
    That is how President Reagan inherited a record $40 B budget deficit and small trade deficit mostly from oil imports and turned them into 1/4 trillion annual deficit leading to a tripling of the national deficit in 8 and a large trade deficit. That is how George W inherited a large budget surplus and large trade deficit and turned it into huge budget deficits and huge trade deficits.
    How can one love their ideology so much that their policies hate their country so much.
    Canadian conservative thought, ideology, and parties have been invaded and replaced by the Tea Party rabid right and its hatred for the nuisance 90%.
    Canada has added over $170 B in national debt under Mr Harper and Mr Flaherty because they are Canadian socio-economic Oreos. Canadian on the outside and Tea Party American southerners on the inside

    • OK, I didn’t get through the whole thing, but your premise isn’t very strong. The truth is that the structural balance was already headed down before the Tories’ first budget. They did accelerate it, but with increased spending as much as the GST tax cut.

      Considering that this was in a period of a Liberal and then a Conservative minority governments, hardly surprising.

      Then the recession hit, and no one knew how bad a fiscal crisis is, and even now you don’t acknowledge that fiscal crises are not followed by robust recoveries like normal recessions. The fiscal path that took place between 2006 and 2011 was not likely much different than if the Liberals or NDP were in power, but if it differed at all, there might have been even more spending, and higher deficits.

      Since 2011 we’ve seen something quite different. This gov’t is serious about shrinking the size of government.

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