Small but manageable or big and controversial? -

Small but manageable or big and controversial?

Jim Flaherty says not to worry about the deficit, but the numbers offer cause for concern


Well that’s a relief.

Just this morning I was blogging about how very hard it will be, or so I was told by fiscal guru Don Drummond, to wrestle the federal budget back into balance now that it has fallen so deeply into deficit.

But then came this afternoon’s not-for-attribution briefing at the Department of Finance, backing up Jim Flaherty’s big speech out in Victoria, and now I have a whole new perspective.

Not to worry. This will be a breeze.

“Taking into account revision to the private sector outlook, we now forecast a small but manageable deficit in 2014-15 of only $5.2 billion,” Flaherty reassured us in his speech, “—roughly one half of one per cent of our expected GDP.”

Small but manageable. A tiny fraction of the economy. Whew.

And I was sweating there for a minute, especially when I saw in the new “Update of Economic and Fiscal Projections” document released by Flaherty’s department that the deficit is now projected to peak this year at a staggering $55.9 billion.

Now, the remarkable thing about the path Finance charts for shrinking the deficit from $55.9 billion in 2009-10 to a mere $5.2 billion in 2014-15 is that it assumes no new spending restraint measures whatsoever.

That’s right. This is the status quo outlook, not a set of projections based on tough new cuts.

More than that, the update guarantees as a planning assumption “the growth track” for transfer payments to provinces and people, especially seniors, children and the unemployed.

In other words, this plan sees the deficit plummeting while politically sensitive transfers are allowed to keep ballooning, and before any new steps at all to slash department spending are imposed.

Wondering how this can possibly be a credible stance? Judge for yourself. Here are the critical elements in the calculation:

—Based on the average of private-sector forecasts, the economy will resume consistent, steady growth next year, posting a 4.1 per cent rise in gross domestic product in 2010 and better than 5 per cent every year after;

—The taxes and other revenues flowing from that sustained growth will rise from a low of $216.6 billion this year to a mighty $298.2 billion in 2014-15, about a 38 per cent increase over five years;

—Direct program expenses—what federal departments spend themselves rather than giving to provinces or people—will remain nearly flat, creeping up from $120.7 billion this year to $122.3 billion in 2014-15.

(A key caveat on this last figure: take away the temporary cost of special steps meant to combat the recession and solidify the recovery, and ordinary underlying spending, including public service salaries, is projected to grow from $102 billion this year to $121.7 billion in 2014-15.)

Given this broadly favourable picture, Conservative officials say there will be plenty of room to make further cuts, possibly enough to eliminate that pesky $5.2 billion deficit in 2014-15. But they argue now is not the time to spell out such savings in detail. The recovery is too fragile and the economic outlook too uncertain to make confident projections.

My initial reaction to all this (aside from the cheap sarcasm of the first few paragraphs of this post) is that the numbers are not unreasonable but far from certain.

To my eye, some enormously difficult budget-making in the years to come is foreshadowed in a table called “Outlook for Program Expenses.” It assumes a vice-tight grip on discretionary spending, even before any specific new restraint measures are taken. Spending on Crown corporations—flat for six years. Transfers to cities and towns—flat for six years. Other transfer programs run by departments—fractional increases only.

And this after a decade of open-handed growth in just about every corner of federal spending. Today’s tone from Flaherty & Co. might have been, relax, our problems are “small but manageable,” but I suspect the decisions that will have to be made to keep them that way will be big and controversial.


Small but manageable or big and controversial?

  1. "In other words, this plan sees the deficit plummeting while politically sensitive transfers are allowed to keep ballooning, and before any new steps at all to slash department spending are imposed."

    Flaherty just said on Newsworld that he will cut program spending. He didn't say which programs.

    • No worries. Flaherty has been talking about cutting programs since getting elected. He even used to talk about selling assets. No longer!

  2. Harry Forestell just tried to pin him on who would feel the pain, but Flaherty slithered away.

    By the way, Harry is vastly underestimated as a political journalist. He should take over from Don Newman rather than Fluffy.

  3. This is the scary part, that even though they say it will take 6 years to get back to surpluses, accumulating well over $100 billion in extra federal debt, that's based on rosy numbers. Not completely out of the ball-park numbers, but significantly better than we saw in the lead-up to the recession.

    We've seen two increases in the federal deficit for this year alone. With a track record this shoddy over such a short time span, what confidences can Flaherty give that his numbers, especially over the long-term, are right this time?

    • With a track record this shoddy over such a short time span, what confidences can Flaherty give that his numbers, especially over the long-term, are right this time?

      Let me clear up some of your confusion. The numbers don't have to be reliable for 6 years or even six months. They only have to hold up for the six weeks of an election campaign.

    • Craig, without disagreeing with your point, I am still lost on the notion that Flaherty could cook the books in ontario and than come to ottawa and have anyone have confidence in anything he might say/do/think/feel…

  4. not-for-attribution briefing ?

  5. The truth doesn't matter. It only has to sound plausible.

    New Conservative campaign slogan.

    • I don't think that has anything to do with party affiliation. I seems to remember "Income Trusts are Safe" and "We will eliminate the GST" coming from both sides of the house.

    • Thanks for the timely reminder, Professor Flanagan.

  6. I think those growth assumptions will turn out to be optimistic. Anyone want to take that bet?

    • Particularly so when the second half of our double-dip recession hits…

  7. Oh, and does the projection state any assumptions about debt yields? In the Drummond piece this morning, you pointed out how rising yields in the US (likely) could cause yields to rise here, which would put even more pressure on the budget, especially as we pile on another $140 billion in debt.

  8. I'll bet one line item – open ended growth of oil royalties from the Tar Sands – based upon the Tories handsoff policy to Big Oil – will become a big political hot potato – this election!

    • How will we hear that over the "Liberals forced this election" jeering section?

    • You'll lose that bet.

      Environment ranks low on peoples minds these days, and with more news coming out about decades of cooling, I doubt your average Canadian is going to want to stifle growth in the oil sands.

      It's a major economic driver in Canada's engine don'tcha know.

      To quote Clinton "It's the economy, stupid"

      • "and with more news coming out about decades of cooling…"

        First: science is based on data, not news.

        Second, this "news" that will, like, totally disprove global warming has been "coming out" for years now without ever actually arriving. This "news" will be credible when it's announced by a credible body of climate scientists. Until then, it makes more sense to believe the current credible body of climate scientists who state, unequivocally, that human activity is causing an accelerating increase in global temperatures.

        • I didn't say it disproved AGW,
          but Fact-check this:

          Prof. Latif is one of the leading climate modellers in the world. He is the recipient of several international climate-study prizes and a lead author for the United Nations' Intergovernmental Panel on Climate Change (IPCC). He has contributed significantly to the IPCC's last two five-year reports that have stated unequivocally that man-made greenhouse emissions are causing the planet to warm dangerously.

          Yet last week in Geneva, at the UN's World Climate Conference — an annual gathering of the so-called "scientific consensus" on man-made climate change — Prof. Latif conceded the Earth has not warmed for nearly a decade and that we are likely entering "one or even two decades during which temperatures cool."

    • What's Iggy's position on these evil "tar" sands you speak of.

      Different then Harper?… I wonder.

  9. "Wondering how this can possibly be a credible stance?"

    Nope. This is Jim Flaherty we're talking about here. Diamond Jim Flaherty, whose budget projections have never been worth the toilet paper they're printed on.

    4.1% growth in 2010?!? Sustained 5% growth after that? Is there an independent financial analyst in the entire country who would endorse those numbers?

    For the love of god, we have to get such forecasting out of the hands of politicians. Canada needs a Parliamentary Budget Officer. Whatever happened to that guy?

    • Let's not forget the atrocious job he did as Treasurer (or had they already changed to Minister of Finance?) of Ontario.

      The man certainly has a track record.

    • Maybe geddes can confirm, but arent the forecasts used a consensus (poll of polls) of the private sector forecasts….so that it takes it out of his hands. A practice that I believe martin used as well.

      Maybe I have that one wrong

    • I'm not an economist, but I think the 4.1 & 5% figures are pre-inflation, which differs from the numbers you read in the newspaper. Slice off the normal inflation rate of 2% and you get much more reasonable GDP growth figures of 2.1% and 3%.

      The only reason why I think this is the case is because those numbers are (supposedly) "private-sector forecasts" — I don't know of a single private-sector forecaster that is projecting (after-inflation) GDP growth of 4.1%/5% anytime soon for Canada. Someone (who actually knows what they're talking about) feel free to come in and correct me.

      • It's a very important distinction – yes, those numbers are pre-inflation. That does make them far more reasonable (it's not simple subtraction, as you've used, but that's a pretty close approximation). It still assumes overly stable, efficient growth over the full five years, which is dubious, but it's certainly possible.

        Here's the problem – inflation affects spending too. That modest 4% growth in spending drops to about 2%, but no cuts in spending are included in these forecasts.

        That's why I'm concerned – all these numbers are possible, but not together. Now, I expect exaggeration in the numbers, since it comes from a politician. But, these numbers are already rather upsetting without the rosy shine of political number-fudging, so it's definitely a concern.

      • 1. take a look here to see the actual report.
        2. the private sector average for nominal gdp growth in canada is indeed 5.1 on average for 2010-2014 (see pg 15)
        3. real gdp growth for this same period forecast to be 2.9%.
        4. real gdp growth is equal to nominal growth in gdp net of inflation.
        5. nominal not real gdp is what is typically used to forecast because it historically predicts better the amounts that goverments collect and spend. inflation matters.

    • Yeah, TJ, that struck me, too. At least 5% every year thereafter? Show me the economists lining up to endorse that crystal ball…

  10. Finance planning was, as of January, in an impossible situation with the Liberal and the NDP calling for spending no matter what. Harper really didn't want to move on the stimulus pkg but, in the end, had no choice. Now, the other parties are derisive and calling them inept. These politicians are nothing if not foolish and do not tell people the Harper gov't consulted with the best financial think tanks in the country to keep Canada viable. Give them credit and if, as predicted, economically we move ahead, with proper fiscal management, we will bring the critical debt down. To be noted – the CPR rail cars are stored on rail sidings across the country. Nothing is moving.

  11. Jim has been wildly off the mark over the past 18 months. His error rate has accelerated in the past 9 months. He's missed the deficit mark by around $40 billion — for the current year. Why should anyone listen to what his predictions for next year are, let alone 2014-2015? Now if only we had the revenue from those GST cuts …

    Seriously, I would expect that even Conservatives loyal to Harper should be wondering how Jim is still in his post. (He's got to be drag on his boss.) Today's major announcement with no details on program spending or cuts, no commitments and no plan would be farcical in a re-run of "Yes, Minister", but they're unnerving coming from the Finance Minister.

  12. Why would Flaherty provide details on spending cuts if we might be on the verge of heading into an election? He's a politician, not a suicide bomber.

  13. Recent editorials (mostly in the english language press) have been critical of Michael Ignatieff for not telling us why he wants to be prime minister and what policy alternatives he would have to propose. They seem to have overlooked the fact that the people who are actually running the government do not have coherent policies of their own. Mr. Ignatieff's answer to these critics should be that his basic policy is to restore sanity and competance to the management of government business. The myth of Conservative economic competance has been stripped away by their bumbling handling of the national finances. It increasingly looks like Liberals will have to step in once again the mess conservatives have made of the national finances. Fortunately Jean Chretien is still around to provide advice and insights on how he cleaned up the mess left by Mulroney.

    • Personally I have had my fill of the Chretien ways of doing business. Paul Martin might have been a credible suggestion rather then the leader of adscam!.

      • No kidding! I totally agree with edbystander. We sure don't want Chretien with his fingers in the pie, again. We've had enough. Times were good in the Chretien days and they still screwed it up. Harper, in my opinion, has done what any logical politician would be doing in these tough times, and he's starting to pull us out. Any remember, it's not his fault that the world is in this shape. We can't blame Harper for what Washington started, especially when our banking system fared much better than any other G-7 country. Live and Let Be, at this time anyway!

  14. More flim flam, or as we say down on the farm, bull S**T from Canada 'Wonder Kid' of finance backed by the Governor of the Bank of Canada who loves to brag about the superiority of Canada's financial institutions and economy.

    Flaherty sounds all too ominously like Mulroney's several ministers of finance who turned a blind eye when the deficit and the debt where balloooooning out of control between 1984 and 1993. Mulroney had promised fiscal Conservatives and the Blue Tories on Bay Street that he would deal with the growing deficit and debt left by the Trudeau years but allowed spending to skyrocket because he was determined to get re-elected in 1988 at any cost to Canadian taxpayers.
    Why is it that the US Republicans and the Canadian Conservatives, both of whom preach the gospel of fiscal conservatism, are responsible for the US Trillion dollar deficit and 'gazzillion'dollar debt and the Canadian looming $56B dollar deficit and skyrocketing debt?
    I guess Harper's ambition for power corrupts, and the excessively-blind ambition for even more power based on the outright elimination of any and all opposition parties corrupts absolutely!!

  15. Remember the state of Ontario's finances after Mr Flaherty had the books – I forget now – was it 4 or 6 billion dollar deficit?
    Scary part folks is Mr Flaherty has brought his accrual financing tricks to the Feds now – Remember that we have yet to receive or pay for one of those super planes – one Arctic Slushbreaker – one Arctic Port – The bills have not come due for them yet so they are not booked in to our ballooning debt. This situation can not continue. A $300 million election may save us Billions in future debt.

  16. SMALL AND MANAGEABLE???? DHA! What ever happened to the balanced or surplus years before the CANADIAN version or the "republican party" was elected and we still had some " good for the people' programs.As far as I'm concerned it's all about smoke and mirrors with the '' Conservatives",hard to know what to believe anymore except they seem determined to ruin and divide CANADA.

  17. Possibly the politicians are on crack. Governments that grew accustomed to spending commensurate with a decade of exceptional growth might find the next decade or two a little flat. If so, the earlier the cuts, the better. Every dollar spent to "stimulate" pre-2008 expectations is one more that will have to made up later in addition to dealing with overall lower revenues.