The federal government is likely on track to eliminate the deficit sooner than forecast, but next week’s budget should still be a stingy one, TD Economics suggests.
In a new report looking ahead to the upcoming federal budget, TD says that with upgraded economic assumptions, and spending that’s coming in well below target, the federal government is on track to record a deficit of around $26 billion for fiscal year 2011-2012, which is nearly $5 billion better than estimated in its last Fall Update. Assuming that a good part of this positive momentum carries forward to future years, TD says the government would be in a position to record a modest planning surplus in 2014-2015, which is one year earlier than previously forecast.
However, despite this good news, TD expects that austerity will remain the key theme in the 2012 budget. It notes that any additional room in the budget could be used to incorporate more prudence into the budget plan, cancel the need to find up to $4 billion in annual spending efficiencies, raise program spending and/or to implement new targeted tax cuts.
“Based on our calculations and assuming spending efficiencies have been secured, the government could keep its 2015-2016 balanced budget target and raise program spending growth by roughly a half a percentage point per year,” relative to the fall update forecasts, it says. “However, such a boost would not dramatically alter the difficult restraint challenge at hand,” it cautions.
TD says that the budget is likely to include: a plan that shows a balanced budget by 2015-2016, with no new taxes or revenue-raising measures, and deficit reduction based purely on spending restraint; no changes to provincial transfers; several measures targeting job creation; and, spending cuts in federal departments (defence, veteran affairs, public works and foreign affairs are thought to be particularly vulnerable, it notes).
It says that it also expects details on the long-run outlook of Canada’s retirement income system, including possible changes to the eligibility criteria for Old Age Security.
TD expects the government will move to implement many of the recommendations put forth by a recent commission focused on improving business innovation, including enhancements to the Scientific Research and Experimental Development program and the creation of an Industrial Research and Innovation Council. It also says new rules are expected to expedite the environmental approval process for energy-related projects.
Other moves that could be in the budget include: civil service cuts; spending restraint in areas such as agricultural support, border infrastructure, public safety, infrastructure renewal and official languages programs; and, it suggests that the government could take further measures to curb household debt, possibly by lowering the maximum mortgage amortization period to 25 years (from 30 years) or other actions designed to rein in home prices and personal borrowing.
“We fully recognize that austerity is never easy and can have marked regional, industrial and households impacts. However, moving to eliminate the deficit as an economy recovers — albeit gradually — is responsible fiscal policy,” TD says.
“Given that we are still in the recovery phase, it is easy to be myopic about the economic challenges present and the inherent risks to the forecast. However, the long-term challenges such as growing health care costs and an ageing population are equally as important. With so much talk about growth enhancing measures, we hope the budget lays out a more comprehensive plan for improving the economic outlook over the long run,” it concludes.