Boiling the budget down to the number that matters most

CHECK BACK after 4pm today for Maclean’s coverage of the federal budget

Let’s assume the federal budget to be delivered day after tomorrow maintains, as advertised, more or less a holding pattern for 2010-11 on spending and taxes. The real news (after any fun surprises) will be in whatever framework it sets for shrinking the deficit over the next few years.

Prime Minister Stephen Harper summed up the challenge yesterday this way: “We know we cannot … spend at this kind of level indefinitely.” Given the $50-billion-plus deficit Ottawa is now running, his point might sound unassailable.

In fact, spending is already projected to track down as a share of the economy over the next three years, back to where it was in 2007-08, before the recession struck. After running at a stimulus-bloated 14.7 per cent of gross domestic product this year, program expenses are slated, in the 2009 budget, to drop back to 13.1 per cent of GDP by 2013-14.

Yet even that shrinkage won’t come close to clearing up the deficit, at least not according to some widely reported independent analysis. The problem is that with only modest economic growth expected, after a period of deep tax cuts, revenues won’t amount to enough to balance the books, even if spending as a share of GDP declines.

So the Prime Minister’s assertion that spending can’t go on at this level shouldn’t be understood to mean that spending is now historically high and we have to go back to normal levels. It’s historically low, and yet, he tells us, must go even lower.

But not all spending. In a recent budget briefing, a senior government official said the rate of growth of transfer payments to provinces for health and education will be maintained, as will payments to the elderly.

That promise to maintain not just the absolute level but the pace of increases is, if true, a remarkable commitment. Benefits to the elderly not only grow with the size of the retired population, they are also fully indexed to inflation. Major transfers to the provinces and other levels of government are forecast to average 5.2 per cent growth a year for the next five years. Health transfers now automatically climb six per cent a year and the Canada Social Transfer, which supports education, is guaranteed to grow 3 per cent a year.

If the Tories are serious about holding rates of growth in those areas sacrosanct, then what’s left—so-called direct program expenses—would have to be seriously cut to shrink the overall spending level. That includes Defence, Indian and Northern Affairs, student financial assistance, Crown corporations, and lots more.

Direct program expenses were running at around 6.2 per cent of GDP before the recession; hard times prompted them to spike up to over 7 per cent. They are forecast to settle back to 6.3 per cent by 2013-14, again according to the 2009 budget plan.

So that number, it seems to me, is the first one to look for if the 2010 budget maps out a credible deficit-fighting strategy: how much are the Conservatives planning to reduce the direct spending of the Government of Canada below its present portion of the economy?

It’s the number to look for if you’re conservative: it will tell you if the Tories are being candid about how much smaller they think government should be. For the same reason, it’s the number to look for if you’re liberal.




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Boiling the budget down to the number that matters most

  1. In my opinion taxes will go up at some point but no government is going to campaign on increasing taxes unless the fiscal situation deteriorates significantly. I believe the social transfer contracts expire in 014 and they will be up for renegotiation. So we will see a lot of smoke and mirrors until after the next election. This is why it is even more important to have a majority government next time out. The government must have the flexibility to make the tough decisions that need to be made. The last thing we need is 4 parties trying to manage the country.

  2. "Spending, apparently, cannot be cut. Back in 2001, when Paul Martin was still finance minister and federal spending was a mere $130-billion a year, the idea of spending reduction was seen as just not feasible. There is nowhere to cut, no fat to trim, and no program that can be scaled back. In the wake of his own 2001 budget, Mr. Martin said: “People always come back and say, ‘You can't find the money to do that within $130.5-billion?And the answer is no.'”

    This year federal spending is expected to top $270-billion on its way to $300-billion by 2015, an increase of 160%. So we have gone in a little more than a decade from a place where Paul Martin could find nothing to cut from $130-billion to a place where nothing can be cut from $300-billion." Terence Corcoran, Nat Post, Jan 25, 2010

    http://network.nationalpost.com/np/blogs/fullcomm

    I don't know what Cons are going to do but they better do something. Many economic conservatives are thinking similar thoughts as Corcoran is. There better be spending cuts or Harper's comment about how difficult this budget was is a bad joke.

    • "Nothing is as permanent as a temporary government program".

    • It already is a joke, jolyon.. they've already said there's going to be no significant spending cuts this year, and they're not even going to pull back on any of the stimulus/recession commitments.

      What's the tough part about "second verse, same as the first"? The only tough thing I can think of is figuring out how to spin it so that even the bib & kneepad crowd can rationalize it to themselves.

  3. There is still lots of 'slush' in the budget, but it will take some guts to slash programs that are of special interest to small, but highly vocal, groups of Canadians (often supported by the MSM). Start with cutting all funding to NGOs, they look closely at CBC (does it really need the number of TV channels it is maintaining now?), limit the number of public servants assigned to program management – the private sector can somehow manage many programs supervised by one manager yet in the public service there seems to be managers, supervising managers, supervising coordinators ondown; limit the number of ministries – yes all MPs what to be a minister, but that comes with a huge cost. What does the federal government constitutionally need to be responsible for and align the budget accordingly. That is a message that all Canadians need to hear.

  4. John, are the Tories just expecting that with economic recovery increased revenues will cover their losses?

    I too am similarly skeptical that the Cons. will cut anything at all on Thursday.

    • How about a peace dividend from the winding down of the Afghanistan mission?

      Probably very small at best, but I'm curious…

      • Yeah, it'll probably be years before we know the true cost of that mission.

        My guess: much higher than previously thought. (I know, what powers of prescience!)

  5. "We know we cannot … spend at this kind of level indefinitely," said Stephen Harper while thinking privately to himself, "just until I get voted out of power.. let whoever's after me deal with having to make the cuts"

  6. This conservative is not encouraged. They're going to blow this one.

  7. what is the deficit as a % of GDP?

  8. I believe in publicly stated goals so that progress can be monitored.

    Given that spending/GDP ratio is now reflective of the Diefenbaker era,
    I think that an appropriate next target might be that of Arthur Meighen.

    Onward and downward !

  9. More cuts to programs the Conservatives see as frills, but no cuts to support for sports, I bet. And of course, more prisons – maybe workhouses are next.

  10. The spending number is the only thing they can control…at least outside of transfers, which can be auto stabilizers, or auto spenders. So thats a proper thing to focus on

    buuuuuttt……

    3 year projections are notoriously bad. And projections coming out of a recession even worse. It doesnt take much of an underestimation of growth to get rid of the 19 billion structural shortfall 5 years out. A little extra employment cuts EI expense, a little extra GDP growth adds some revenue a decent pace.

    The focus and measurement really does have to be on spending, they need to control that and a year to 18 months out we will have a much better idea about whether we are on a sustained growth track, a double dip or "slowth" (slow growth). Every extra 1 % growth of GDP adds a permanent 2 to 2.5 billion to the revenue base. This deficit isnt impossible and it isnt inevitable without tax increases, control spending where you can and we will see in a year where we are.

    That the Libs have been increasing their talk on spending recently tells me they believe revenue will continue to grow more than expected.

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