Blessed with a more favourable fiscal position than most other major economies, Ottawa's leisurely pace of deficit reduction continues. And that's a good thing.
The 2013-2014 fiscal plan is a classic "small budget" – there's very little here in terms of major new measures from a macroeconomic standpoint, with the emphasis largely on improving the microeconomic backdrop. Additional restraint unveiled Thursday is minimal, with much more of the document's 433 pages devoted to new support for skills training, infrastructure and manufacturing. Indeed, the budget goes out of its way to soft-pedal any restraint, distancing itself from the austerity seen in much of Europe and now arriving on U.S. shores. With the economy likely to grow by less than 2 per cent again this year, that's a broadly appropriate tack for fiscal policy.
The budget reinforces the plan to balance the books by mid-decade. There is still a $3-billion annual cushion built into the projections, to allow for a small underperformance in the economy. A lot of things still need to go right over the medium term to erase the deficit by fiscal 2015-2016, including sustained spending discipline and a rebound in gross domestic product (GDP) growth and Canadian export prices. The bottom line on the fiscal front is that the government can achieve its medium-term target – policy is mildly restrictive and achievable, there is a degree of prudence, and the starting point is slightly better than expected.
The main challenges in hitting the fiscal goals will be ensuring the recovery stays on track, and controlling spending. Over the next five years, spending growth will average 2.1 per cent per year, or in line with inflation. As a result, program spending as a share of GDP is expected to drop to pre-recession levels of just below 13 per cent by mid-decade, from 13.8 per cent in fiscal 2012-13 and the recent peak of 16 per cent.
Ottawa's fiscal 2012-2013 shortfall was trimmed only fractionally to $25.9-billion from the November, 2012 budget update's projection of $26.0-billion, as a sag in Canadian economic growth late last year and added costs from Atomic Energy of Canada Ltd. (AECL) frustrated a sharper drop. The budget deficit is projected to narrow notably to $18.7-billion for fiscal 2013-14 (which starts April 1), but still larger than the $16.5-billion forecast in the November update.
While this year's deficit is larger than expected a year ago, at 1.4 per cent of GDP, it's roughly one-fifth the size of the imbalances in the United States and Britain, just to keep Ottawa's challenge in perspective. You know your problems are manageable when changes to hockey equipment prices are arguably the biggest headline-grabber in a budget document.
Douglas Porter is chief economist at BMO Capital Markets.