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.