On Friday, November 20th Canada’s new Finance Minister, Bill Morneau, issued an accounting update on federal spending and revenue projections through March 2016, the end of the fiscal year. His presentation was largely based on estimates tabled by the Parliamentary Budget Officer earlier in the week, giving him non-partisan backing for his projection that the Conservatives’ $1.6 billion surplus in the first six months of the year will morph into a projected year-end deficit of $3 billion. Given all the horrible news about ISIS attacks in Paris, Syrian refugee resettlement plans and the lockdown in Brussels, why should you care? The answer is that even these small variations in government projections will have a major impact on the Trudeau government’s ability to make good on its campaign promises.
These are really tiny values that don’t have a lot of economic impact, but they do have political repercussions. To use some round numbers, Canada has a $2 trillion economy and the federal government spends about $300 billion per year. A $3 billion dollar deficit, at 0.15% of Canada’s GDP, is not going to make any impact on Canada’s debt markets, inflation rate or economic growth. Our relative federal government debt is already the lowest of the G7 nations, around 26% of GDP, and it is projected to continue to decline over time even if the Liberals make good on their promise to run three years of $10 billion deficits to invest in infrastructure and stimulate economic growth. If the Liberals intend to hold to the promise of deficits capped at $10 billion, then they have some difficult decisions to make about cuts elsewhere in discretionary spending in order to free up the money to fund new initiatives. It is precisely because the Liberals promised to keep the deficits so small that any encroachment on their spending envelope will have such a major impact on their ability to keep to their plan.
Where did the money go? Former finance minister Joe Oliver correctly pointed out that the revenue projections from the PBO have not changed, but rather it is an increase in projected spending that creates the swing from surplus to deficit. What has not been disclosed is where the extra $4.6 billion in spending comes from. Were the Conservatives facing this situation, they would have put pressure on departments to restrain spending to levels below their Treasury Board allocations and return those unspent funds before the end of the year. This strategy was used throughout the last Conservative mandate to post lower deficits than Finance Department projections. This policy was a major shift away from traditional government practice, which was to push unspent funds out the door as much as possible in the last fiscal quarter, January through March of each year. If the Liberals indicate to their ministers that they will tolerate a return to this spendthrift practice then it will severely impact the Liberal economic spending plan. They need to find the money somewhere within the system.
The money can be found by continuing several policies enacted by the Tories. Readers closer to government will remember the Deficit Reduction Action Plan (DRAP) and the Strategic Operating Review (SOR), initiatives designed to squeeze efficiencies out of the roughly $100 billion in discretionary (non-statutory) government spending. There was also a Treasury Board effort to end funding for “perennial sun-setters” which were programs which had outlived their usefulness but were still around. If the Liberals leave these policies in place, they can certainly correct the projected deficit and reallocate spending so that they get the full impact of their $10 billion deficits as they intended.
The Liberals only want to run deficits equal to 0.5% of Canada’s GDP, which is a very small figure. Ideally, they would find another $10 billion in savings elsewhere in our $300 billion spending basket so that they would have a net $20 billion to spend on their priorities. To accomplish this, DRAP and SOR will have to remain in place, Conservative policies that they are. Over the next few months we will learn what advice the professional civil service gives the new government on how to fund their commitments – if it turns out that Bill Morneau announces deficits much higher than $10 billion, we will know that Conservative spending controls are dead and that the government is back to its old profligate ways.