THE DISAPEARING SURPLUS
Several weeks ago, the Prime Minister announced major tax cuts for families with children. He announced income splitting for families with children under the age of 18; enhancements to the Universal Child Care Benefit and to the Child Care Expense Deduction; and, he announced a doubling the fitness tax credit for children and made it tax deductible. The Child Care Tax Credit was, however, eliminated in order to pay for income splitting. These announcements have changed the dynamic for the 2015 election. The total cost of these announcements was $5.0 billion in 2015-16, chewing up a big part of the projected surpluses.
Basically, the Prime Minister introduced a “budget” in Vaughn Ontario and not in the House of Commons with very little analysis and information. Subsequently, the Government introduced the required Ways and Means Motion in Parliament. The Minister of Finance was only in Vaughan to introduce the Prime Minister. This finally confirms what outsiders have suspected for a long time. The Prime Minster is also the Minister of Finance. It also appears that the PMO is the real Department of Finance.
The Budget process has been turned upside down. Normally, the government’s economic and fiscal situation is set out with or before the policy announcements. It would appear the Finance Department wasn’t ready and the announcements couldn’t be delayed because of the time needed by the CRA time to prepare the 2014 tax forms.
Nevertheless, Joe Oliver has finally presented his Economic and Fiscal Update before the Toronto Club, one day after Remembrance Day, and during a week when the House of Commons is not sitting. True to form for Ministers in this government, Mr. Oliver would prefer to talk to a friendly crowd and not answer any “tough” questions or provide much in the way of helpful information. His predecessor was also reluctant to make his Updates to Parliament. This has been in keeping with the government’s commitment to “transparency” and “accountability”.
The Prime Minister has already left to attend a G-20 Leaders meeting in Australia to discuss what the G-20 can do to strengthen global economic growth. Joe Oliver is following right behind. At an earlier meeting G-20, finance ministers had recommended that G-20 countries take action to raise their collective GDP by 1.8 per cent after 5 years. In its October World Economic Report, the International Monetary fund, which advises the G-20, also concluded “in advanced economies, an increase in infrastructure investment could provide a much-needed fillip to demand, and it is one of the few remaining policy levers available to support growth, given already accommodative monetary policy.” It will be interesting to see what comes out of this meeting and what Mr. Harper and Mr. Oliver will say.
What have we learned from the Economic and Fiscal Update? The Update goes on at length about how Canada has done so much better than other G-7 countries using selected data and selected time periods. This is to be expected and one thing is certain we are going to hear this tiresome litany over and over in the coming months. Nevertheless, if you can wade through this rhetoric you will find that unlike in earlier years, this Update provides some useful information.
First, the tax cuts for families and small businesses, already announced, have chewed up a large part of the projected surpluses. Without these tax cuts the government would have recorded a “planning” surplus of $300 million this year, followed by surpluses of $6.9, $9.2, $9,8 and $10.6 billion in the subsequent four years. As a result of the tax cuts the government is now expecting a deficit of $2.9 billion in 2014-15 followed by a surplus of only $1.9 in 2015-16 and surpluses $4.3, $5.1, and $6.8 billion in the following three years. Not much left in the “cookie jar” for the 2015 election.
Second, even the small amount in the “cookie jar” would not exist if the Finance Department had not continued to use higher-than-required employment insurance premiums to help generate the budgetary surpluses in 2015-16 and 2016-17. If EI premium rates were set at the break-even rate in those two years, there would be small deficits in both in 2015-16 and 2016-17, rather than surpluses. If the EI premium rate “fix” were not enough, the Finance Department also includes $1.2 billion in unrealized asset sales to help achieve a balanced budget in 2015-16. In the past, asset sales would be included only once the sale had been completed had since the potential for slippage is too large.
Third, the Update shows just how sensitive the budget forecast is to changes in oil prices. The survey of private sector forecasters was taken before the decline in oil prices. The Update states “If crude oil prices were to remain near their current levels, the Department of Finance estimates that this would reduce the level of nominal GDP by approximately $3 billion in 2014 and $16 billion per year thereafter, relative to the levels forecast in the September 2014 survey”. As a result, the Department of Finance adjusted the private sector forecast for nominal GDP downwards accordingly. This has reduced government revenues and the budgetary surplus by $500 million this year and $2.5 billion each of the following four years. This adjustment was made over and above the adjustment for the “risk adjustment factor”, which lowered revenues by a further $3 billion per year. As a result, there is a significant amount of prudence built into the fiscal forecast.
The Update provides an interesting backdrop to the upcoming election. After five years of cutting government programs and services, the deficit has been eliminated and the modest surpluses that were emerging are rapidly being used up. Right now the federal government is falling in size and will continue to do so. As the Update says program spending is falling as a share of GDP, and revenues as a share of GDP are at their lowest level in fifty years. Despite an increase in debt of about $150 billion, the debt burden is falling and could reach 25 per cent by 2019-20, two years ahead of target. The Update, not surprisingly, is silent on what would happen once that target is reached. The government would very much like to avoid that debate.
Overall, this Update provides a very good summary of the Conservative government’s economic manifesto.
Finally, don’t Mr. Harper and Mr. Oliver to contribute much in the way of concrete actions at the G-20 Meeting. Perhaps they will just distribute copies of the Update.