Flaherty’s budget challenge
In his fall fiscal update, Finance Minister Jim Flaherty is sticking to his storyline of success. So he should; it’s a very good story. And Flaherty remains the government’s best messenger, who among other things knows how to stay on message.
His narrative is that Canada is first in G7 in job creation, with the biggest improvement in employment since the recession, more than one million new jobs in the last five years. Canada has the lowest deficit, and lowest debt-to-GDP ratio “by far” in the G7.
He’s equally sticking to his story of balancing the books by 2015, but now forecasting a surplus of $3.7 billion by then, as opposed to a forecast surplus of only $800 million in the budget last March. But the question is, how do we get from a deficit of $17.9 billion to a surplus of $3.7 billion in only two years?
The current deficit does include a one-time charge of $2.8 billion for Alberta flood relief, and another $60 million for Lac Megantic, but that still leaves a deficit of $15 billion, so he needs to find and save nearly $19 billion to make his surplus number.
The most important paragraph in the 2013 budget was the $28 billion in forgone exports and $4 billion federal revenue shortfall because of the oil and gas discount in selling to the United States as opposed to the world price.
Flaherty has now staked the government’s reputation, and his own, on hitting this number. But getting there won’t be easy. The most important paragraph in the 2013 budget was the $28 billion in forgone exports and $4 billion federal revenue shortfall because of the oil and gas discount in selling to the United States as opposed to the world price.
Other things for Flaherty to be concerned about include worries in Europe and the U.S. about their economies’ inflation being less than forecast. The IMF has also dialed back its global GDP growth forecast for 2013 to 2.9 per cent from 3.5 per cent at budget time. And its forecasted growth for advanced economies is only 1.2 per cent, down from 1.4 per cent, with the forecast for emerging economies such as China and India growth revised down to 4.5 per cent from 5.5 per cent. How will this trending down affect our exports, and ultimately personal and corporate tax revenues?
Then there’s QE2, the second round of quantitative easing by the Federal Reserve in the U.S. Under QE2, the Fed has been buying back bonds at the amazing rate of $85 billion per month. What happens to the U.S. economy if and when the Fed starts tapering down? The Fed also continues to pump cheap liquidity into the market, with an overnight rate of only 0.25 per cent.
So in terms of growth, the recovery is still fragile.
And in terms of efficiencies, Ottawa will need more than freezing the operating budget, which will save $550 million in the current fiscal year and $1.1 billion in the next one.
Well, one area where federal program spending increases will stabilize over time is in health care transfers to the provinces.
At the back of the fiscal update is a page called “Trends in Provincial Health Spending.” It’s quite noteworthy that annual growth in provincial health spending has come down from 5.5 per cent in 2010, to 4.2 per cent in 2011, to a projected 3.5 per cent in 2013.
This has occurred since Flaherty’s unilateral announcement in Victoria in December 2011, that upon the expiration of the 10-year Health Accord in 2014, health transfers to the provinces would continue to grow by six per cent a year for three years, but in line with the economy after that, with a “floor figure” of three per cent growth.
According to these numbers, the provinces have already made the adjustment down to a 3.5 per cent increase in health spending, and have a surplus of 2.5 per cent.
At the time of the Victoria meeting of finance ministers, the provincial representatives freaked out. They’d been expecting a series of federal-provincial meetings on renewing the Health Accord. Instead, they got a press release announcing a fait accompli.
But looking at the growth in provincial health spending now, the question arises as to where the provinces are spending that surplus.
Flaherty certainly put the cat among the pigeons that day.
Assuming Flaherty hits his surplus target of $3.7 billion, Ottawa would have no need of the $3 billion contingency reserve — and so the real surplus number would be $6.7 billion.
Flaherty and Stephen Harper wouldn’t be using much of that to pay down debt, not in an election year. They’d be using most of it for tax cuts and other goodies in the 2015 budget. Middle-class tax cuts, income splitting, and things like that.
Flaherty has the best office on Parliament Hill, and Finance is the strongest department in the government. They don’t do smoke and mirrors.
It’s not by accident that, the day after the update, Standard & Poor’s reaffirmed Canada’s gold-plated Triple-A credit rating.
But getting to a surplus position, given all that can go wrong with economic forecasts that are guarded in their optimism, will not be a walk in the park. It will take more than good management. It will take good luck, the luck of the Irish, and Flaherty knows a lot about that.