… Budget stimulus never stopped.

Federal spending never returned to pre-recession levels

The key litmus test for this budget was always going to be how realistic it was with respect to achieving a balanced budget by 2015-16. The governing Tories have staked both their economic and political credibility on being able to balance the budget. The current plan, which mirrors previous budgets, relies on controlling the growth in spending and hoping revenues increase sufficiently to balance the budget.

The governing Conservatives plan to increase program spending by a restrained 0.8%, and remain tight-fisted for the next two years, increasing program spending by only 1.2% and 2.6% respectively in the coming years.Last year program spending increased by 2.9% but to their credit, the Conservatives have been able to restrain the growth in program spending over the last three years, increasing, on average, by only 0.9%.

As in previous years, the risk lies mainly on the revenue side. The Conservatives are expecting revenues to grow by 3.8% this year compared to 2.2% last year. They expect even stronger growth in subsequent years: 5.9% in 2014-15 and 5.5% in 2015-16.

The Conservatives’ record on forecasting revenues raises concerns. The actual revenues collected have been less than the amount budgeted in every budget except one since 2008. The average difference between budget and actual has been almost $5-billion. Relying on strong revenue growth to balance the budget is risky since events outside of Canada, particularly the U.S., can knock the budget off course.

The less risky approach to balancing the budget relies on spending reductions. As illustrated in the accompanying chart, actual program spending spiked in 200910, increasing by $37-billion in one year. The key to understanding the deficit today, however, lies in the spending post2009-10.

One of many problems with stimulus is that they’re almost never undone. They simply become the base from which fu- ture spending grows. As illustrated in the chart, that’s essentially what happened in Canada.

For reference, the dashed line represents program spending adjusted for population growth and increases in prices

Most of the deficit

would vanish if spending returned

to previous levels

based on 2008-09 spending. It assumes the level of per person spending in 200809 is maintained over time. This provides us with one reference point to gauge whether or not actual program spending returned to its pre-stimulus levels.

What’s clear from the chart is that it didn’t. And this shouldn’t be surprising. Almost all governments that enacted stimulus subsequently spent from the new, higher levels because it is very difficult for governments to reduce spending politically.

If the federal government had returned to the previous level of spending, the deficit this year (2013-14) would be roughly $3.1-billion instead of a projected $18.7billion. These higher deficits due to higher spending also mean higher debt levels.

Another consideration and one that is included in the budget, albeit in a limited way, is the opportunity for improved economic growth through tax reform. The economy can be improved by strengthening economic incentives. Reducing or eliminating special privileges, loopholes, and other goodies in the tax code allow the government to reduce marginal personal income tax rates, which remain internationally uncompetitive and a key impediment to additional investment, work effort, and entrepreneurship.

Since 2006, for example, a number of new tax credit programs have been introduced, ranging from credits for children’s fitness to employment to public transit. These tax credits alone cost an estimated $7.9-billion in 2012. Reducing or eliminating these programs provides resources to reduce marginal tax rates without affecting the overall deficit. The government indicated a willingness to close some loopholes but the resulting revenue gains, an expected $4.4-billion over five years, will simply augment existing revenues. In other words, the government is closing these loopholes to gain revenues.

The status quo budget delivered on Thursday was largely as expected. The basic plan calls for spending restraint coupled with the hope of rising revenues. A less risky approach and one that would certainly entail less debt would actually reduce program spending to bring it in line with revenues, achieving a balanced budget sooner and with less risk.