Speech From The Throne: Balanced Budgets And Job Creation-Playing To The Conservative Base
Wednesday’s marathon throne speech once again repeated the well worn phrases that “our government is leading the world by example”; “Canada now leads the G-7 in job creation; in income (not GDP) growth; and in keeping debt levels low”; “our government will eliminate the deficit by 2015-16;” and, “our government will reduce the debt/GDP ratio to 25 per cent by 2021”.
These messages will continue to be drummed into Canadians over the next two years leading up to the 2015 election. Unless you have been living on Mars, most people know that these are not big achievements. Until recently, the U.K., the EURO area, the U.S. and Japan have been performing terribly so the bar has been pretty low, and most advanced OECD countries could easily jump it.
Moreover, Canada’s ability to perform well in fiscal and banking sector terms was primarily the result of actions taken by the previous Liberal government. Nevertheless, you have to give credit to the Tory communication strategy for having convinced Canadians that the Harper government is responsible for Canada’s “stellar” economic and fiscal performance.
Despite this communication success, the government, nevertheless, seems to feel that it needs do more to strengthen its “reputation as good fiscal managers” prior to the 2015 election. To this end, the Government, in its Speech from the Throne, set out a number of new fiscal targets. Given their experience in meeting the fiscal targets they have set since 2006 – none of which have been met to date – one would have thought that they would have learned their lesson. But, regrettably, the Speech from the Throne contained a number of new ones.
First, the Government announced that it would introduce balanced-budget legislation. The legislation would require balanced budgets during “normal” economic times and concrete timelines for returning to balance in the event of an economic crisis. This raises a number of rather important questions. Most importantly, what constitutes “normal economic times”? With the ageing of the population, most economists now believe that potential economic growth will now average less than 2 per cent per year. Does this mean that the budget will need to be balanced (or in a surplus) when real economic growth is 2 per cent or more? Is this commitment on an ex ante or on an ex post basis? What will happen if real economic growth is greater than 2 per cent ex post but the Government recorded a deficit? Will the fiscal impact of natural disasters be exempt or will offsets have to be found during “normal” economic times? Will the timeline for returning to balance in the event of an economic crisis be determined by the severity of the economic crisis? Will the budget need to be balanced over an economic cycle? That is, will the legislation require that surpluses be realized during normal economic times to offset the run up in federal debt during the economic crisis or that only balanced budgets are required? Finally, Federal revenues are largely determined by the growth in nominal income – that is real economic growth plus inflation. Will inflation be taken into consideration in determining “normal” economic times?
Perhaps Mr. Flaherty will provide some answers to these questions in his Fall Economic and Fiscal Update? If he does his research, he will find that attempts to implement balanced budget legislation have in most cases failed miserably. This has certainly been the U.K and the EURO area countries and for most provinces.
Even better he might want to review his own track record in trying to achieve a surplus. Based on the March 2013 Budget forecast, it will have taken the Government eight years to offset the fiscal impact of the 2008 – 2009 financial crisis (an increase in the federal debt of $172 billion). In fact, since coming to office in 2006, Mr. Flaherty has recorded only two surpluses – 2006-07 and 2007-08 - and these were inherited from the actions undertaken by the previous Liberal government. After inheriting a surplus the government immediately cut the GST by two points, and in doing so created a structural deficit and an unsustainable fiscal situation, which then required significant spending cuts in the 2010, 2011 and 20012 budgets in order to put the federal finances back on a sustainable path. Why they would now introduce balanced-budget legislation, given their past failure to achieve one, is a mystery.
Second, the Speech from the Throne restated an earlier commitment made by the Prime Minister that the federal debt-to-GDP ratio would be reduced to 25 per cent by 2021. As we stated in an earlier commentary, this is not an overly ambitious target as both the Department of Finance and the Parliamentary Budget Officer have indicated that this target would be reached without taking any further fiscal action. The Speech from the Throne also indicated that the federal debt-to-GDP would be reduced to pre-recession levels by 2017. In 2007-08, the federal debt-to-GDP ratio was estimated at 29.9%. In the March 2013 Budget, it is projected to be 29.6% in 2016-17 and 28.1% in 2017-18. No real news here.
Third, the Government also stated in the Speech from the Throne that overall federal operating budget expenses will be frozen. What does the government hope to accomplish by this? What it will accomplish is a lot of questions as to what it will mean for government programs and services.
Not surprisingly, no further details were provided and given past experience probably never will be. In the 2013 Budget, operating expenses were projected to be $74 billion in 2014-15, increasing to $77.8 billion by 2017-18. This would imply further restraint measures over the period 2015-16 to 2017-18, amounting to a cumulative $6.9 billion.
How these reductions will be secured is not clear. Departmental operating budgets have been subject to restraint since the 2010 Budget. To date, the Parliamentary Budget Officer has not been able to obtain details as to what measures were put in place to realize these savings. It is simply not reasonable to assume that the new savings can be found through additional efficiencies. Since the largest share of operating costs relate to employee compensation (wages, salaries, pensions, sickness benefits, etc.), there will need to be major structural reforms in this area. This would appear to be what the government intends to do. Attacking the public service plays well with the Conservative base.
Fourth, the Harper government is betting its 2015 election on eliminating the deficit in 2015-16. This would allow them to implement a number of targeted tax changes, the most important being the splitting of family income for tax purposes for families with children under the age of 18. This will be a major issue during the 2015 election especially given who benefits (high income families) from this change and who doesn’t (low income families).
Most forecasters believe that the government is on track to eliminate the deficit in 2015-16, barring a meltdown in the U.S. economy. The government’s own forecasts in the 2012 and 2013 budgets showed the deficit being eliminated in 2015-16 and the federal debt-to-GDP ratio declining.
In the 2013 Budget, a surplus of $0.8 billion was projected, including a “risk adjustment factor” of $3 billion. If not needed, the surplus would be $3.8 billion. The freeze in departmental operating budgets, therefore, is not about achieving a balanced budget in 2015-16, but rather about demonstrating to its political base that it remains committed to reducing the size of government
The Speech from the Throne also indicated that the deficit for 2012-13 would be lower than forecast. But which forecast? In the 2012 Budget, the Government forecast a deficit of $21.1 billion for 2012-13. This was revised up to $26.0 billion in the November 2012 Update of Economic and Fiscal Projections. In the 2013 Budget, it was revised down marginally to $25.9 billion. Based on monthly Fiscal Monitor results for 2012-13, we argued that the final outcome could be lower than $25.9 billion, so this announcement is no surprise. However, by how much, we will have to wait for the Annual Financial Report for 2012-13, which should come out any time now.
Finally, the Speech from the Throne stated that the Government would “work with provinces and territories” in a number of areas, including credential recognition, labour market mobility, removal of trade barriers, among others. But this would require the Prime Minister to meet with the provinces and engage in discussion and debate something he has been reluctant to do. Right now the government is unable to get agreement with the provinces on its proposed training agreement, because the government never bothered to discuss it with the provinces before announcing it in the 2013 budget. This is not a government with a strong commitment to federal-provincial cooperation. This is a government that has been downloading problems onto the provinces and then lecturing them on the need to get their fiscal houses in order.
Finally, lets agree that a million jobs have been created since the end of the recession and Canada’s job creation record is the best in the G-7. Lets also agree that our youth unemployment rate is “lower than in many advanced counties”. But let’s also agree that this is nearly not good enough. Economic growth has been slowing since 2010 and is not likely to exceed 1.6 per cent this year. Employment growth is slowing and percentage of the population aged 15 and over working is less today than before the recession. The labour force participation rate is lower than before the recession and if it weren’t for people leaving the labour force, because they have become discouraged in finding meaningful employment, our unemployment rate would be well over 7 per cent, compared to 5.9 per cent before the recession.