Finance Minister Jim Flaherty’s updated economic and fiscal projections unveiled this week were remarkable: Despite a weaker economic outlook, the federal government now expects a larger budget surplus. This is possible because the government is adding more spending restraint and selling some assets in order to balance the budget.
Press coverage mainly focused on the size of the surplus, the year it might emerge, and what to do with it. Most commentaries ignored how much spending will be cut, whether the timing is appropriate, and what negative economic impacts might occur.
Viewed in isolation, these recent spending cuts are modest. But the cumulative impacts of all restraint taken thus far will undoubtedly be felt over time. Some worry that even though the cuts may barely get noticed by the public today, they must eventually. At some point, they fear, after you cut away all the fat, you eventually hit muscle. And then bone. Death by a thousand cuts. Slowly boiling a frog. It’s happening one budget announcement at a time.
We got to this place because after the global recession, the federal government had a budget deficit. Stimulus spending rose and revenue fell. Balancing the budget before the next election became a political imperative. The question wasn’t whether or when, it was how to balance the books.
With tax increases not considered an option, treasuries look to economic growth to generate more revenue. Unfortunately, the global economic recovery has been losing steam. It has disappointed in 2011, 2012 and 2013, and is expected to remain frustratingly slow looking ahead. The Canadian economy is dealing with softer commodity prices (which are a key driver of our incomes), constrained demand for our exports, weak investment and low inflation.
With modest tax revenue, getting back to balance means reining in spending. Since transfers to people and governments are politically sensitive and often formula-driven, the heavy lifting fell to direct federal program spending. Several freezes were applied to operating budgets to hold the line on things like government wage bills, contracting and travel. But this money also funds programs and services. It’s unclear exactly how much spending has slowed and which specific areas have been, and will be, affected.
Part of this opacity stems from the government’s failure to provide sufficient details in response to information requests from the Parliamentary Budget Officer on federal spending plans.
Outside of Parliament, it’s even harder for budget watchers to get a clear view of the numbers. Because of changing accounting rules, one can’t properly assess spending restraint by simply comparing levels across budget documents. Moreover, allowances for planned spending that doesn’t occur – so-called lapsed spending – have increased in recent budget forecasts. This means less of the money that Parliament allocates is actually being spent, which in 2012 applied to almost one-tenth of appropriations. Identifying what tax dollars aren’t being spent on, and to what effect, is tricky.
Thankfully, the government recently attached a price tag (Budget 2013 Table 4.2.7) to the overall fiscal savings announced since the 2010 budget. To this tally, we can add the new spending restraint and assets sales from the update (see attached table, Federal Fiscal Restraint Measures Since Budget 2010, millions of dollars).
These numbers illustrate several underappreciated points. First, at about $90-billion, overall fiscal restraint from 2012 to 2017 is large. Second, these government estimates suggest that this ongoing fiscal tightening will more than reverse the temporary stimulus used to counter the recession, which had injected about $60-billion into Canada’s economy (see Annex 2 of Budget 2012, Table A2.2).
Third, digging into the numbers confirms that the vast majority of fiscal consolidation comes from the spending side, representing more than three-quarters of the total. While this isn’t surprising, the incremental nature of the spending restraint likely is (see attached graph, Federal Spending Restraint Measures Since Budget 2010, billions of dollars). Notice how this second restraint phase of the government’s Action Plan wasn’t announced in one shot; rather, it was done gradually, in a budget document here, an update there. As a result, spending was tightened, slowly, but significantly over time.
In this week’s budget update, facing the prospect of weaker growth and a slower path to surplus, the government chose more spending restraint. While revenue and other spending categories will remain steady as a share of gross domestic product over the forecast, direct program spending is expected to fall to 5.4 per cent of GDP from 6.5 per cent. The ultimate end game of this fiscal strategy is clear: The size of the federal government will shrink, one budget at a time.
Stephen Tapp is a research director at the Institute for Research on Public Policy. These views are his own. Follow him on Twitter @stephen_tapp.