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Op-eds 2016 Post Media

Plamondon: Morneau's budget shows the sky is not falling
Published on: March 22, 2016 | Last Updated: March 22, 2016 6:42 PM EDT

Much will be made of the 2016 federal budget for failing to meet the fiscal promises made in the 2015 Liberal election platform. In fact, the Liberals didn’t even come close to limiting the annual deficit to $10 billion per year or lowering the relative debt load in each year they are in office.

Changing economic circumstances explain a good portion of the financial gap. Since Canada is a net exporter of oil, tanking commodity prices give us a double whammy of lower royalty revenues and higher employment insurance costs. But the bad news is fully accounted for in this budget, which is premised on $25 oil when we are already well north of that figure.

While fiscal hawks are screaming about four years of deficits that average close to $25 billion, this ignores the fact that if budget projections are met, the fiscal position of the federal government will change very little from what exists today.

Virtually every economist worth their rations will tell you that the single most important number in assessing the financial condition of a government is the relative level of its debt. Imagine the difference in anxiety levels and financial flexibility between a household with a high mortgage and low income versus a low mortgage with a high income. While we should worry about a slippery slope when governments abandon a balanced-budget anchor, the projections in the 2016 Liberal budget tell us the federal debt load today will be essentially unchanged when we next go to the polls.

Also holding steady in this budget are relative tax revenues. At 14.5 per cent of GDP, the tax take under Prime Minister Justin Trudeau is lower than the average under Prime Minister Stephen Harper. Over the last 50 years, there have been only six years when Canada had a lower tax burden than it will under Trudeau over the coming four years.

The key question on revenues is whether the rise in the marginal income tax rate the government put in place in December 2015 will produce the expected revenues (Ontario went from a 49 per cent rate to a 54 per cent rate). On that score, the government is handing the Canada Revenue Agency almost half a billion dollars over five years to help keep taxpayers in line.

While relative government spending is rising over the next three years, projections show that it will revert to the current level four years out. The biggest financial challenge the Trudeau government will face, and the biggest risk, is scaling back relative spending in year four of its mandate.

It’s worth noting that spending on government operations (as distinct from payments to individuals, and other governments) is being held in check. Capped at an average increase of just 1.5 per cent over four years, this represents a net reduction in resources when inflation is taken into account. It’s not exactly “happy days are here again” for public servants.

Overall, the government has followed through on its promise to add stimulus to a lethargic economy. In the coming year, that works out to about $25 billion, or a little over one per cent of GDP. But in every year thereafter, projected revenue increases will outstrip spending hikes, although not in sufficient amounts to bring the budget anywhere near being balanced. It’s a growing economy that helps to keep the relative debt burden in check.

How the government spends our tax dollars has shifted, but the bottom line is that the financial position of the government will change very little over the coming four years. Revenues and debt are held steady, while spending and the deficit will rise, then fall. At least that’s what the budget documents tell us.

Bob Plamondon FCPA is a consultant in the fields of transformation, performance management, and public finance. He is also the author of four bestselling political/history books.