With analysis from Bill Curry: With the tabling of Finance Minister Joe Oliver’s first budget, the federal government climbs out of deficit for the first time in years and sets up how the election will be fought in October. These are some of the factors that helped shape the budget.
1 The Surplus
The federal government has been in deficit since the 2007-08 fiscal year, just before the global economic downturn. The government is forecasting that 2015-16 will mark Ottawa’s return to surplus after seven straight years of deficits.
Curry: This is the central political promise for the Conservatives. All other promises had to fit within a balanced budget. With lower expected revenues due to lower oil prices, the government was forced to scale back its original spending plans.
2 Oil Prices
The price of oil fell dramatically in the second half of 2014, from a high of $108 (U.S.) a barrel to under $60. Ottawa’s revenue took an immediate hit in the form of reduced economic growth, which leads to a decline in tax revenue. As Bank of Canada Governor Stephen Poloz has said, the upside of cheaper oil – such as a boost in exports from a falling dollar and more consumption spending as Canadians shell out less money on gas – will take longer to materialize in the Canadian economy. Private sector economists consulted in March told Ottawa they expect the price of oil to stay relatively low for years.
Curry: Finance Minister Joe Oliver announced in January that he would delay the release of the budget until at least April, largely because of the drop in oil prices. The delay allowed Ottawa to get a better sense of where the economy is headed. However, critics also wondered whether the real reason for the delay was to wait until the 2015-16 fiscal year started in order to sell its remaining shares in General Motors for a net gain of $2.1-billion.
3 Risk if economy slows
To compensate for the budget’s sensitivity to oil prices and global developments, $2-billion of the $3-billion contingency fund is being put aside to shore up Ottawa’s bottom line. But the federal budget could dip into the red again if the Canadian economy stalls as it did in the first quarter of 2015. Here's what a one-per-cent drop would look like.
Curry: Economists generally expect oil prices will gradually rise, but also acknowledge that it is a very unpredictable commodity. The Bank of Canada has said research shows forecasts are more reliable when they simply use the current – or spot – price for oil rather than trying to guess future prices.
4 Employment Insurance
The federal government is currently collecting more money in EI premiums than it has spent on benefits, providing a source of extra revenue for Ottawa. The premium rate is set to decline in 2017.
Curry: The government insists the EI fund will balance over time, but the Parliamentary Budget Office says Ottawa appears to be using EI revenue to help balance the books. Businesses say any surplus should go to lowering the cost of premiums paid for by employees and employers, while the NDP says it should go to providing more generous benefits.
5 Tax cuts
The Conservative government has unveiled a suite of targeted tax cuts in each budget, and the centrepiece of this budget is the Family Tax Cut. Because the measure was actually introduced in the fall, eligible families were able to file for the tax cut this spring. The cost of all these credits helps to reduce the budget’s surplus.
Curry: Only about 15 per cent of Canadian households will benefit from income splitting but another aspect of the Family Tax Cut will be more widespread. Every family with kids under 18 will be receiving at least $60 a month. One twist is that the new payments will be delivered on July 21 – retroactive to Jan. 1. That means parents will receive hundreds of dollars from the government just three months before the federal election.
6 Benefits for seniors
As the population of Canadian seniors grows, so does the cost of taking care of them. Elderly benefits, including Old Age Security and the Guaranteed Income Supplement, are projected to grow about 5.3 per cent per year faster than the rise in nominal GDP. This swallows up an increasing amount of federal (and provincial) budgets.
Curry: At a time of growing concern over voter turnout, older Canadians are consistently more likely to cast a ballot. For the 2011 election, only 39 per cent of those aged 18 to 24 turned out to vote. In contrast, 72 per cent of Canadians aged 55 to 64 turned out and 75 per cent of voters aged 65 to 74 cast ballots. Many of the policies in the budget are aimed at this key demographic.
7 The size of government
After years of deficits, the federal budget returns to balance at a level much smaller than it has been in decades. Federal revenue as a share of the economy is at the lowest level in more than 50 years, at 14.4 per cent for 2013-14. Program expenses were at 13.2 per cent, which is down from the stimulus spending era but up from a low of 11.9 per cent in 2000-01.