June 2011 Budget: Why Bother?

The Minister of Finance, Jim Flaherty, tabled a budget on June 6, 2011, just over two months after he tabled his last budget, which died on the order paper with the dissolution of Parliament due to the election.  The latest budget contained two of the election promises: potential reimbursement to the province of Quebec for costs associated with the potential harmonization of the provincial sales tax with the GST and the phase-out of political subsidies.  Both of these initiatives could have been contained in separate legislation.  The Minister also provided an update of the deficit estimate for 2010-11, which could have been done in the release of the March 2011 Fiscal Monitor.  Apart from the above, there was nothing new in this Budget.  The Minister could just as easily have retabled the March 2011 Budget and saved a lot of trees in the process.  That is what the President of the Treasury Board when he retabled the Main Estimates for 2011-12.  He did not adjust the Estimates to be consistent with the March 2011 Budget or delay tabling such that the Estimates could be consistent with the June 2011 Budget.  He just retabled what had been tabled previously, which was based on the October 2010 Economic and Fiscal Update. Those Estimates are out-of-date, but obviously the Governemnt didn't care.

The media appeared to be waiting for details on the “Strategic and Operating Review” exercise, but the Cabinet Committee tasked with this review was just announced and results are not expected until the fall at the earliest.  

The concerns that we raised in our assessment of the March 2011 Budget (see “March 2011 Budget: The Deficit That Won’t Go Away” March 2011 www.3dpolicy.ca) were not addressed in this Budget and they remain.

Economic Assumptions and Risks

The economic assumptions in the June 2011 Budget were basically unchanged from those in the March 2011 Budget (see Table 1).  Statistics Canada released revised historical national accounts data and these were carried forward.  However, these revisions had no impact on the fiscal projections.  In addition, as was the case in the March budget the Government adjusted downward the average private sector forecast for nominal gross domestic product (GDP) by $10 billion per year as an “an adjustment for risk”.  It adjusted the average private sector forecast for the March 2011 Budget by a similar amount.

Table 1

Nominal Gross Domestic P{roduct ($ billions)

March 2010 Budget     
  Private sector survey    1,716  1,801  1,890  1,975  2,064
  Budget planning assumption    1,706  1,791  1,880  1,965  2,054
  Difference        -10       -10      -10      -10     -10
June 2011 Budget     
  Private sector survey    1,719  1,804  1,893  1,979  2,068
  Budget planning assumption    1,709  1,794  1,883  1,969  2,058
  Difference        -10     -10      -10     -10      -10
PBO: May 2011 Update   1,723  1,795  1,872  1,957  2,054
  Difference from June 2011 Budget         14          1      -11     -12        -4


The June 2011 Budget planning assumption for nominal GDP is roughly similar to the Parliamentary Budget Officer (BPO) forecast.    

The “risk adjustment” of $10 billion implies lower revenues, or a “fiscal prudence factor”, of about $1.5 billion per year.  In comparison, budgets over the 1994-95 to 2005-06 included explicit prudence of about $4 billion in year one, rising to $7 billion in year 5, reflecting the fact that uncertainty increases over time.  If the Government had included the same prudence in the June 2011 Budget, there would be deficit of bout $3 billion in 2015-16 rather than a projected surplus of $4.2 billion.

The June Budget notes that the private sector economists view the risks to the Canadian outlook as balanced. However, the OECD in its latest report notes that “this is a delicate moment for the global economy  ... and there is some concern that if the downside risks reinforce each other, their cumulative impact could weaken the recovery significantly “.  As part of the downside risks, they include the possibility of further increases in oil and commodity prices; a stronger-than-anticipated slowdown in China; the unsettled fiscal situation in the United States and Japan; and the renewed weakness in housing markets in many OECD countries.  In addition, financial vulnerabilities remain in the euro area.  Any medium-term fiscal forecast should reflect these risks in order to ensure that its fiscal targets are met.  The June 2011 Budget does not score well on that account.

Fiscal Projections

With the exception of 2010-11 and 2011-12, the fiscal projections are unchanged from the March 2011 Budget (see Table 2).

Table 2

Federal Government Budgetary Balance ($ billions)

March 2011 Budget Balance     -40.5      -29.6      -19.4        -9.5        -0.3         4.2
   Policy Decisions         
      Sales Tax Harmonization        -2.2    
      Phase-out political subsidy               s            s            s             s
      Reprofile of stimulus funding         0.5       -0.5    
      Total         0.5       -2.7            s            s            s             s
   Economic Developments      
      Direct program expenses        3.9     
      Public debt charges       -0.1     
      Total        3.8     
   Net change        4.4       -2.7           s           s           s            s 
June 2011 Budget Balance     -36.2     -32.3      -19.4       -9.4        -0.3         4.2


Note: Totals may not add due to rounding

s: small

A negative number implies an increase in the deficit. A positive number implies a decrease in the deficit.

The deficit for 2010-11 has been revised down by $4.4 billion to $36.2 billion.  Downward adjustments were made to the various components of direct program expenses, notably transfer payments (down ($1.8 billion of which $0.5 billion was attributable to a reprofile of stimulus funding from 2010-11 to 2011-12), other operating expenses (down $0.9 billion) and operating expenses subject to freeze (down $1.7 billion). With the exception of the impact of the reprofile of the stimulus funding on 2011-12, these adjustments had no impact on future years.

The better outcome for 2010-11 was expected.  Since the release of the September 2010 Fiscal Monitor, we have argued the deficit for 2010-11 would be much lower than forecast by the Government.  With the release of the March 2011 Fiscal Monitor, we felt that the deficit would be about $35.5 billion and could in fact be even lower when the audited financial results are released in the fall.  We still feel that program expenses are overstated, especially for elderly benefits, employment insurance benefits and direct program expenses.

For 2011-12, the deficit has been revised up by $2.7 billion to $32.3 billion, due to the provisional liability of $2.2 billion for the province of Quebec and the reprofiling of the stimulus funding.  The Department of Finance did minor “fine-tuning” of some of the components of budgetary revenues and expenses but on balance these were offsetting. Given the uncertainties in forecasting, these adjustments are questionable.

How Credible is the June 2011 Budget?

 We continue to express concerns about the medium-term fiscal forecast.  Apart from the uncertainty associated with the risks noted above and the lack of credible prudence in the budget projections, we continue to believe that the forecast for “other revenues” is overstated and that for “direct program expenses” is understated.  In previous budget forecasts, the Department of Finance made significant upward revisions to “other revenues, without adequate explanation.  Both the PBO and we questioned these adjustments and until a satisfactory explanation is forthcoming, believe that they are not justified.

The same concern relates to direct program expenses.  In previous budgets and updates, downward adjustments were made to this component, which were not related to policy initiatives.  Again no explanations for these adjustments were provided.  In addition, this component has been subject to a number of expenditure restraint measures.  PBO has requested details on how departments and agencies will manage these restraint measures, with no response from the Government.  As a result, it has discounted the impact of the restraint measures, pending details from the Government.  We also have expressed concerns about the profile of this component of spending and the impact of the restraint measures (see “March 2011 Budget: The Deficit That Won’t Go Away” March 2011: www.3dpolicy.ca).  This is a serious issue and unless details on how the Government expects to achieve its forecast of direct program expenses, its deficit projections lack credibility.



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