SOME FINAL THOUGHTS ON THE UPCOMING BUDGET
Minister Flaherty has finally announced that the budget will be presented on March 21st. This is eight days earlier than last year, but unfortunately too late to make the Main Estimates that were tabled before March 1st relevant to Parliament. As has been the case for six of the government’s eight budgets, the Main Estimates will not be based on the most recent budget economic assumptions and policy decisions. Parliament will once again be asked to approve Government spending for the upcoming fiscal year, which will become out of date with the tabling of the 2013 budget.
Why has it taken so long to prepare a budget that even the Minister of Finance has said will be a “stay the course” budget? Minister Flaherty has repeatedly said that there will be no new major “risky” spending initiatives in the budget and no tax increases. But he will need to include something to address First Nation’s issues and to deal with youth unemployment. He will also likely announce the extension of the Canada Building Fund (or some equivalent) and PPP Canada, although it appears that funding for the latter two is already included in the expenditure framework. Closing of some off-shore tax loopholes and further restraint measures affecting federal employee compensation will likely round out the list. There will likely be nothing economically significant, although the politics of the changes could be important.
The primary budget objective will be to eliminate the deficit by 2015-16, and of course, as an afterthought, “create economic growth and jobs”. The Conservative government has apparently adopted the EURO model of economic growth, even though the EURO area countries have finally realized that austerity without growth doesn’t work.
Can the Government eliminate the deficit by 2015-16? In the 2012 budget, the Canadian economy was forecast to grow by 2.4 per cent in 2013. In the November 2012 Economic and Fiscal Update, this was cut to 2.0 per cent. Now the private sector forecasters that Minister Flaherty uses are forecasting average growth for 2013 of around 1.7 per cent. This significant downward revision to growth in 2013 will have a major impact on government revenues, which will be only worsened by the fall in oil and gas prices over the last 12 months.
Given all these changers, how can Minister Flaherty still claim in the 2013 budget that the Government will eliminate the deficit by 2015-16? This remarkable outcome could be accomplished with a combination of the following. First, there would have to be additional major credible cuts to government programs; second, there would have to be some “creative budget accounting”, including “one-time” savings initiatives in 2015-16; and third, there would have to be a significant recovery in global economic growth in 2014 and 2015. This would require that: the U.S. “miraculously” finds political harmony in Congress and solves its fiscal problems; that the EURO area “magically” discovers political unity among 17 countries; that Japan suddenly emerges from a decade of no growth; and that China, finally embraces a non-intervention exchange rate system and adopts policies to promote consumption led growth. Look for Finance to forecast a significant re-bound in economic growth in 2014 and 2015. Private sector forecasters always forecast that the economy will recover strongly, partly because that is the way their economic models work, and partly because that is what their clients want to hear, including the Minister of Finance. Unfortunately, this hasn’t been happening.
Perhaps it is not too much to hope for -- if only pigs could fly.
The Government has made the elimination of the deficit by 2015-16 a key part of its 2015 election campaign. Fortunately for them, Canadians won’t know if this will happen until the fall of 2016, when the public accounts for 2015-16 are published, long after the election. Canadians shouldn’t be fooled by unfounded claims.
The Government is conditioning everyone to expect very little in the budget. Our experience is that when a government does this, you should start to be concerned with the fine print in the budget. Look what happened with the 2012 budget. The actual budget was vague, obtuse, and lacked substance. Then came the budget Omnibus Bill. A two part Omnibus Bill with over 1000 pages, which included legislative changes, only remotely referred to in the budget or not at all. Hopefully, this will not happen again, but the reality now is that the budget runs from the day of delivery (March 21st this year) to the tabling and passing of the budget bills by June 30. Minister Flaherty may deliver his budget March 21st but we may not know what is actually in it until he tables the budget omnibus bill(s). The media should be reading budget documents a lot more carefully than in the past. They should take advantage of Finance and Treasury Board officials and other government officials in the budget lock-up to explain “vague” drafting in the budget.
Last February, we sent Minister Flaherty our suggestions for the 2013 budget (www.3dpolicy.ca). We expressed our concerns that the global economy was slowing dramatically and was expected to continue to do so. Most of the advanced economies are in recession and the major emerging market economies are struggling. A strong recovery in the global economy is not on the horizon. In a recent blog, we questioned his forecast for direct program expenses and the large unsupported deficit decline for 20013-14..It is simply unrealistic and imprudent to plan a budget on the hope that everything will get better in the global economy in 2014 and 2015. We urged that he postpone his commitment to eliminate the deficit and that he undertake a program to strengthen economic growth and job creation.
The Government’s rejection of reality, and its implications for the economy, seems somewhat reminiscent of 2008.