Thursday’s federal budget indicates that Stephen Harper’s Conservative government plans to take another five years to get the deficit down close to zero, which will push up federal debt to $622.1 billion, an increase of $158.4 billion.
There are two questions: Is this achievable? And if so, is the time frame too long?
Based on private sector forecasts, the Department of Finance is assuming economic growth of 2.6%-3.2% in 2010-14 — and that’s based on U.S. growth of 2.7%-3.4%. This is the majority, view but there is a significant minority of economists and money managers who believe the U.S. could either double-dip back into recession or stagnate for many years. If that group is right, deficits will be with us much longer, and the addition to debt much greater.
But even if the moderate growth scenario proves correct, there is still the question of whether the government can restrain spending sufficiently to get the deficit down to $1.8 billion in fiscal 2014-15 (ending March 31).
The budget assumes that program spending drops 3.1% in fiscal 2012, when there is no more stimulus from the federal government’s Economic Action Plan, and grows only 1.6%, 2.5% and 2.5% in the following three years respectively. Almost 40% — or $6.8 billion — of that restraint is suppose to come from finding efficiencies in government and departments rather than cuts to spending. It’s a lot of money to squeeze out of the system.
On the other hand, the government can make more cuts in programs than it currently plans or it can raise taxes — despite its promise in this budget not to do so — should it find itself unable to achieve these savings. Given the depth of this recession, some tax increases would not be unreasonable; indeed Canada will likely be the only major economy that may be able to avoid tax increases in the next few years.
This leads to the question of whether the time frame is too long. Assuming steady economic growth over the next five years may be pushing it. If growth falters in 2013 or 2014, the return to balanced budgets will be delayed. Furthermore, even if growth does continue for five years but falters in 2015, we may never get back to balance – and if 2016 is a weak year, we could be back in deficits in no time.
Given that there are few actual spending cuts and no tax increases in the budget, the government could certainly have chosen to balance the budget in three or four years. It’s noteworthy that when the Liberal government was getting rid of deficits in the 1990s, there were two years in a row – fiscal 1996 and 1997 – when program spending fell.
RBC chief economist: Deficit reduction “realistic”
Craig Wright, senior vice president and chief economist with Royal Bank of Canada discusses the 2010 federal budget including the outlook for deficit reduction and inflation. He spoke at the Government Conference Centre in Ottawa on budget day, March 4, 2010. WATCH