The provinces are doomed, but the federal parties will have a surplus to play with

Scott Clark and Peter DeVries consider the federal and provincial situations and look ahead to a 2015 election campaign in which the parties will have a projected surplus to play with.

What this means is that the 2015 election will be fought over how each political party proposes to use the surplus the federal government is forecasting. The PBO concludes that “the federal government has fiscal room to increase spending, decrease revenues, or some combination of both” without jeopardizing fiscal sustainability”. Mr. Harper has already committed to using some of this fiscal room to allow income splitting for families with children under the age of 18; extending the fitness tax credit to adults; and, increasing the tax-free contribution to savings accounts to $10,000. These commitments were made in the 2011 election. Given the problems facing the Canadian economy, these are probably not the best uses of the surplus if the objective is to create jobs and strengthen long-term economic prosperity. The other political parties can wait before presenting their platforms on how they would use the surplus.

Both us were involved in the planning of surplus budgets after 1998. Our experience is that managing a surplus can be just as difficult as managing a deficit. Mr. Chretien made it easy: one-third to new spending; one-third to lower taxes; and, one-third to lower debt. As it turned out, this formula worked out pretty well.

The Harper government put the federal budget on a sustainable track when it changed the rate of increase in health transfers to the provinces, so one of the first questions might be whether either of the New Democrats (who have complained about the reduction) or Liberals (who have also complained about the reduction) would restore some or all of the transfer rate.

And you can add this projected surplus to the debate on taxation.