Finance Minister Jim Flaherty’s new fiscal plan shows it’s still possible to balance the books when Ottawa tables its budget in 2014 as promised during the spring election campaign — and the economy doesn’t have to beat expectations to do it.
In fact, all the economy has to do is achieve the slow growth that private sector economists have predicted, the government’s new fiscal update shows.
Largely overlooked in the fall economic update released Tuesday is that Flaherty has pumped up his rainy day fund or, as the government puts it, the “adjustment for risk.”
That may be wise, say analysts, given the high level of economic uncertainty. But it also increases the possibility that Ottawa’s revenues will come in better than thought in future years.
“Essentially, he has laid out a baseline that he can improve upon,” said Scotiabank fiscal analyst Mary Webb.
“It’s probably an appropriate policy because you could have the reverse happen if things aren’t patched up in Europe or if the global downturn is more severe. So maybe he’ll need that.”
In effect, Flaherty’s officials have taken the average private sector forecast for Canadian economic growth and plugged in the appropriate revenue and expenses outcomes.
But whereas in the June budget Flaherty subtracted $1.5 billion in expected tax revenues for each of five years projected, just in case economists were too rosy, in Tuesday’s update he doubled the margin to $3 billion for this current fiscal year and also for year 2013-14. For next year, the risk buffer has been tripled to $4.5 billion. It returns to $1.5 billion in the outgoing years.
That’s an extra $6 billion in accounting sleight of hand over the first three years that could push the expected $3.5-billion deficit in 2014-15 into a surplus.
Overall, the contingency set-aside totals $12 billion for the four years in question, meaning if the economy performs exactly as private sector economists expect, Ottawa will have that much money to add to the bottom line.
While significant, it’s not enough to wipe out the deficit before the 2014-15 financial year. The projection expects a deficit of $15 billion in year 2013-14.
Bank of Montreal chief economist Sherry Cooper points out that with a four- or five-year horizon, all projections are just that, estimates of what will happen. The important message is that Flaherty plans to bring down the deficit dramatically in each year of the planning horizon until it tips into surplus territory, she said.
But what Flaherty has done is build in a margin that goes beyond even the most pessimistic of the forecasts.
The base-line assumption used in the update was that the economy will expand in 2011, which is largely known, and in 2012 by 2.2 and 2.1% respectively. Several forecasting houses, including Capital Economics, think the call on 2012 is off the mark and the year will show a sluggish 1.5% advance.
But Webb said Flaherty’s bottom line, with the risk factor built in, is capable of absorbing growth as low as one per cent in 2012 and still remain on track.
The built-in planning margin for downward risk is all on the revenue side. On the spending side, economists have repeatedly pointed out that Flaherty has given himself a tough task.
Aside from keeping program expenses creeping forward in tiny annual two per cent increments, the government is counting on paring back the bureaucracy’s costs by $1 billion next year, $2 billion in 2013-14 and $4 billion in 2014-15.
Factoring out inflation and population growth, Webb said her calculations show the government is actually scaling back the size of government in per capita terms over the next few years.
Many economists, including Parliamentary Budget Officer Kevin Page, have expressed skepticism Ottawa will be able to stick to such a strict diet for such a sustained period. But the risk adjustment does give Flaherty room to miss on both sides of the ledger.
“The minister has built in flexibility if he should need it,” said Webb.