2014 budget preview: Econowatch predictions - Macleans.ca

2014 budget preview: Econowatch predictions

Is this really a ‘do nothing’ budget?

by
Aaron Vincent Elkaim/CP

Aaron Vincent Elkaim/CP

Stephen Gordon

My understanding is this is supposed to be a “stay the course”—or, if you prefer—a “do nothing” budget. The government would prefer to wait until next year before announcing the sort of measures on which it would want to campaign in the next election. So an important goal of this budget is to get the government where it wants to be in 2015: in a position to announce a surplus for 2015-16. This surplus can then be used to finance either new spending and/or new tax reductions.

The problem is how to get there from here. The government likes to say that it is “on track” for a surplus in 2015-16, but that track has a fairly sharp turn ahead and it’s not clear how it’s going to avoid a fiscal derailment. Last November’s fiscal update projected a deficit for the current 2013-14 fiscal year of $17.9 billion, and the monthly numbers from the Fiscal Monitor are consistent with that projection. But that deficit is to drop by more than $12 billion next year.

I’m looking forward to figuring out how a stay the course budget is supposed to produce such a significant change in direction. Failing that, I’m looking forward to having Kevin Page explain it to me.

Kevin Milligan

My expectations are for a fairly smooth ride to budget balance in 2015-16. Revenues are growing with GDP; program expenses are staying roughly constant. This generates the budget balance improvement. Of course, if an unforeseen slowdown hits the economy, the path to balance will be more difficult.

While there may be political pressures to achieve a balanced budget, it is important to remember that the macroeconomic consequences of a deficit in this range are not large. Canada’s GDP is currently at $1.9 trillion, so today’s deficit of $17.9 billion is less than one percent of GDP. That level of deficit is sustainable in the long run, especially given the current trends for spending and revenues. If the government does decide to push this deficit to zero, the macroeconomic consequences of such a micro-dose of “austerity” are just not large enough to raise much concern.

As a mid-term budget, I don’t expect many new initiatives, as the boldest election-ready ideas will surely wait until 2015. Budget watchers do need to keep a careful eye on the details, however, since this government does not seem fond of putting bad news in easy-to-find places. One need only recall last year’s tariff increases, the consequences of which only became clear in the weeks following the budget through the work of Mike Moffatt.

On the tax side, the item highest on my wishlist is a commitment to tax simplification. Whether it is the confused and overlapping child benefit system or the ever-growing list of boutique tax credits, the compliance burden of our tax system continues to escalate. Moreover, the more complex the tax system becomes, the greater is the advantage for those who can afford to hire professional tax advisers. Complexity burdens both the efficiency and the fairness of our tax system.

Mike Moffatt

Overall, I am not a fan of the talk that this will be a “do nothing” budget. I don’t think it’s possible to spend more than $200 billion in a year in a do-nothing way. I have no way of knowing what will be in the budget; you don’t hear a great deal of budget gossip in the coffee shops and diners I frequent in London, Ont. I can, however, make an educated guess.

I take Minister Flaherty at his word that the goal is to balance the budget by 2015. With the economy not improving as quickly as the Bank of Canada hoped, that may prove more difficult than the Finance department had anticipated. That being said, I think they will be able to get there with the moves they are likely to make in this budget.

The challenge for the Tories is finding ways to raise revenues or lower expenses. There are challenges to both. On the expense side, a lot of money is tied up in items such as transfers to the provinces, which makes deep and quick cuts difficult. The government is likely to look at ways it can move capital expenditures forward, such as military procurement. Cuts to the size or remuneration of the civil service is another, though with staffing needs and severance packages there is only so far you can push this to save money.

The revenue side is even more difficult; as one Conservative MP told me when I testified to the House Standing Committee on Finance: “We’re the Tories—we don’t raise taxes!” I expect to see measures that raise taxes that do not appear as they are raising taxes. The changes to the GPT tariff program in last year’s budget were a prime example, with the government raising tariffs by roughly $350 million a year under the guise of “trade fairness.” The ongoing issue of GST on re-insurance contracts is another example that is getting very little press, mainly because it is so complicated. There will likely be more of these, including the leaked measures to crack down on charities engaging in political activities.

As always, there will also be some goodies in this budget. Your guess is as good as mine as to what they will be. My wish list would include infrastructure spending for Southwestern Ontario, along with the elimination of tariffs on consumer electronics (including iPods). The former seems far more likely than the latter.