COMMITMENTS; EASY TO MAKE, DIFFICULT TO KEEP
Mr. Harper recently announced two new economic and fiscal commitments – one relating to the creation of new jobs and a second relating to legislation prohibiting increases in tax and premium rates over the next four years.
How important are these two commitments and how successful has the Harper Government been in living up to other fiscal commitments made since first forming government in 2006? The answers are not important and very badly.
Aim to Create 1.3 Million New Jobs
Mr. Harper stated that his goal is to create1.3 million new jobs by 2020. Where did he get this number? Since the depth of the 2008-2009 recession (June 2009) to September 2015, 1,292,000 new jobs were created. He has stated that this should be achievable over the next six years as well.
Mr. Harper did not state his starting point, so there are a number of different scenarios that could be considered. If the starting point is the annual level of employment for 2014, employment would need to be 1.2% per year on average, similar to that recorded over the June 2009 to September 2015. However, as noted, the starting point for this new objective is significantly different from that over the previous six years. Over the period 2010 to 2014, annual average employment growth was only 0.8%, well short of the 1.2% needed to achieve 1.3 million jobs by 2020. TD Economics recently put out its latest medium-term economic forecast. It forecast an increase of only 608,000 new jobs over the period 2014 to 2019. Assuming the increase in 2020 will be similar to that forecast in 2019 would only result in 708,000 new jobs being created by 2020, well short of Mr. Harper’s objective. Whether his objective will be met is irrelevant as it is beyond the next mandate and who will remember by then. It is a good sound bite for the current election, but likely not achievable.
“Tax Lock” Legislation
Mr. Harper’s proposed “Tax Lock” legislation is akin to Bush senior’s pronouncement “read my lips”. Mr. Harper has promised to introduce legislation, if re-elected, which would prohibit his government from raising personal and corporate income taxes, sales taxes, and employment insurance and Canada Pension Plan premium rates. The legislation would only be effective for the next four years. Again this is solely an election sound bite. It has no relevance at all. If Mr. Harper is re-elected with a minority, the legislation would never be supported by the opposition parties. If he is re-elected with a majority, the legislation should not be required, unless of course he is not that committed.
What is the Harper Government’s record with respect to other fiscal commitments made since 2006?
Promise to Reduce the Federal Debt by $3 Billion
In the 2006 Budget, the Finance Minister, the late Jim Flaherty, promised to reduce the federal debt by $3 billion annually
Although surpluses, well in excess of $3 billion, were recorded in 2006-07 and 2007-08, deficits have been posted in each year until 2014-15. In the April 2015 Budget, annual surpluses were forecast over the period 2015-16 to 2019-20. However, there was no mention that the first $3 billion of these surpluses would be committed to debt reduction. Instead, new policy initiatives were implemented in 2014 which significantly reduced the size of the projected surpluses. The actions to date strongly suggest that new initiatives take priority over debt reduction.
Prior to 2006, the Liberal Government included a $3 billion Contingency Reserve in its fiscal projections to help ensure that its fiscal targets would be met. It could not be used to finance new policy initiatives. If not needed, it would be used to reduce the federal debt. The Conservatives eliminated the Contingency Reserve in its 2006 Budget.
However, given the uncertainties caused by the financial crisis, the Harper Government introduced the “risk adjustment factor” in its October 2010 Update of Economic and Fiscal Projections, whereby the average of the private sector economic forecasts for nominal GDP was adjusted downwards for fiscal planning purposes. No conditions were set on its use. However, in the November 2014 Update of Economic and Fiscal Projections and again in the April 2015 Budget, Finance Minister Joe Oliver stated that if the risk adjustment reserve is not required, “it will be used to reduce the federal debt”.
In the February 2014 Budget, the “risk adjustment” factor was set at $3 billion for 2014-15. However, the Government announced a number of policy initiatives in October 2014, thereby using the risk adjustment factor to fund part of these initiatives. As a result, a surplus of only $1.9 billion was recorded. Furthermore, in the April 2015 Budget, the risk adjustment factor was set at $1.0 billion per year from 2015-16 to 2017-18, and $2.0 billion in 2018-19. Only in 2019-20 was it reset at $3.0 billion, primarily to fund the ongoing costs of Harper’s pre-election promises. This undermines the Harper Government’s commitment to reduce the debt by $3 billion per year. Instead, it is using the risk adjustment factor to fund new policy initiatives.
Reducing the Debt-to-GDP to 25% by 2013-14
In the 2006 Budget, the Government also committed to reducing the debt-to-GDP ratio to 25 per cent in 2013-14. Over the period 2008-09 to 2014-15, the federal debt increased by $155 billion, attributable to impact of the 2008-2009 financial crisis and the stimulus measures implemented by the government under its Economic Action Plans. Note that while a surplus of $1.9 billion was recorded in 2014-15, the federal debt still increased by nearly $0.5 billion, due to an increase in “other comprehensive income”. The debt-to-GDP ratio was 32.3 per cent in 2013-14, well above their stated objective of 25%.
At the September 2013 G-20 Leaders’ Summit in St. Petersburg Russia, Mr. Harper announced a new target for federal debt. He pledged that the federal debt-to-GDP ratio would be reduced to 25 per cent by fiscal year 2021-22. In the April 2015 Budget, the federal debt-to-GDP ratio was projected to be 25.5 per cent in 2019-20. Although the fall in oil prices will negatively impact the debt-to-GDP in the short term, the target of 25 per cent by 2021-22 appears achievable. It is not an overly ambitious target. The real question is what happens after that?
Allocating Part of Surplus to CPP/QPP
The Harper Government also pledged to examine the possibility of allocating a portion of any surplus in excess of $3 billion to the Canada Pension Plan and Quebec Pension Plan “in order to make them more equitable for young Canadian and improve economic consequences”. However, they have quietly abandoned the idea of allocating a portion of any surplus in excess of $3 billion to the Canada and Quebec Pension Plans, without giving any reasons as to why.
Elimination of Government Debt by 2021
In the fall 2006 Update, the Government also stated that the country should aim to the elimination of Canada’s net debt by 2021 at the latest. Total government sector net debt consists not only of the net debt of the federal government but also that of the provinces, territories, local governments and the Canada and Quebec Pension Plans. The pension plans are in a net asset position, given the measures introduced in the mid-1990s to make these plans financially sustainable. With this objective, the federal government is urging the provinces to balance their budgets and to reduce their debt. This objective was made without consulting the other levels of government. According to the Parliamentary Budget Officer’s latest fiscal sustainability report, the total government sector will still be in a net debt position by 2021. With the rapid decline in oil prices, this objective has been pushed even farther into the future. In fact, with the fiscal pressures facing all levels of government from the impact of demographic changes, it is doubtful that this objective will ever be met. The Government has been silent on this commitment since it was first announced. It now states that Canada will continue to have the lowest total government sector net debt-to-GDP ratio among the G-7 countries.
Allocate Interest Savings from Debt Reduction to Lowering Taxes
In the fall 2006 Update, the Harper Government also announced that it would dedicate all interest savings from debt reduction to ongoing personal income tax reductions. Since coming into office, surpluses have only been recorded in their first two years and in 2014-15. In the March 2007 Budget, the Harper Government announced that it would legislate the “Tax Back Guarantee”. To date, no such legislation has been introduced in Parliament.
No Cut To Transfers to Other Levels of Government
In the March 2010 Budget, the Government announced that it would “not cut transfers to persons and to other levels of government”. At a federal-provincial finance ministers’ meeting in December 2012, the Finance Minister announced that, starting in 2017-18, the rate of growth in the Canada Health Transfer (CHT) would be reduced from 6 per cent per year to grow in line with a three-year moving average in nominal GDP, with a funding guarantee to grow by at least three per cent per year. This was done without any consultations with the provinces.
The Harper Government’s track record on meeting its fiscal commitments has not been very impressive. It appears that many of them were not very well thought out when first proposed and upon reflection were quietly abandoned. Others were side tracked by the financial crises and the fall in oil prices. Its key commitment of balancing the budget in 2015-16 is at risk, although Finance officials will be under pressure to come up with innovative ways to show a balanced budget for 2015-16. Final audited financial results will not be available until the fall of 2016, a full one year after the election. By then, who will care.