Reduced program spending keeps Ottawa on track to shrink deficit

OTTAWA – Aggressive cost cutting measures introduced by federal Finance Minister Jim Flaherty over the years are continuing to pay dividends on the government’s bottom line, the latest fiscal report from the Finance Department shows.

Finance reported Friday that its deficit for August fell to $2.3 billion from $3 billion in the corresponding month last year, largely due to $759 million in savings from program expenses.

For the first five months of the fiscal year as a whole, the government was about $400 million ahead of last year’s deficit reduction pace, although the news may be even better for the Harper government.

Earlier this week, Flaherty unveiled a large surprise in the government’s fiscal tracking, showing that last year’s deficit was actually $7 billion lower than what he had calculated in the March budget — again most of the savings were found in what Ottawa calls “direct program expenses.”

That’s the part of the budget Ottawa has most control over and the target of the $5.2 billion in spending cuts introduced in 2012, which included a freeze in operating budgets and a reduction of about 19,000 in the size of the public service.

For the five months as a whole, program spending was up about 1.9 per cent.

“The government remains on track to balance the budget in 2015,” the department said in the report, adding that it will province updated projections later this fall, likely in mid-November.

The Parliamentary Budget Office is also expected to issue a fresh assessment of Ottawa’s fiscal position on Monday.

Flaherty has downplayed the chances of balancing the budget one year earlier than planned, but some economists believe the goal is attainable if things break his way, including better economic growth and more savings than expected from cost cutting.

In last week’s throne speech, the government said it would double down on spending restraint, freezing the overall operating budget to restrain new hires and make further reductions to internal government spending, as well consider selling federal assets.

The Harper government is anxious to present a balanced budget outlook in the spring of 2015, and preferably a modest surplus, in time for an election that fall. Such a success would not only allow the Conservatives to campaign on their record for fiscal competency, but fulfil 2011 campaign promises to reduce household taxes by introducing partial income splitting.

The latest fiscal report shows the government is not being thrown off course by what has been a weaker than expected economy, partly because Flaherty had already built in conservative assumptions.

The Bank of Canada this week downgraded its economic forecast for this year to 1.6 per cent from 1.8, but tellingly, the March budget had already assumed the lower figure. As well, the central bank lowered its 2014 expectation from 2.7 to 2.3 per cent, whereas the March budget counted on 2.5 per cent growth.

The latest figures show revenues continue to rise despite slower economic growth, by $120 million more in August than the corresponding month last year. For the fiscal year so far, revenues are up $2.3 billion, or 2.2 per cent.

Along with the lower growth assumptions, Flaherty has built in a cushion for “risk” that would keep the government on track even if economic performance weakens.

Looking for more?

Get the best of Maclean's sent straight to your inbox. Sign up for news, commentary and analysis.