The Un­known Costs of a “Noth­ing-Burger”

Policy - - In This Issue - Ran­dall Bartlett

At first blush, Bud­get 2018 would have seemed like a “noth­ing-burger” bud­get, if judged by the change in the bud­get bal­ance alone. But scratch be­neath the sur­face, and the overly op­ti­mistic rev­enue fore­casts and un­re­al­is­tic sav­ings that made room for new spend­ing an­nounce­ments quickly be­come ap­par­ent. How did these fore­cast changes come about? It’s tough to tell with­out suf­fi­cient trans­parency around the num­bers for par­lia­men­tar­i­ans to hold the gov­ern­ment to ac­count.

For a lot of com­men­ta­tors, a first glance at the re­vised out­look for deficits in Bud­get 2018 sug­gested it was a bit of a “noth­ing-burger” bud­get. This is be­cause the fed­eral gov­ern­ment’s fore­cast for per­sis­tent fis­cal holes re­mained es­sen­tially un­changed rel­a­tive to the Fall Eco­nomic State­ment 2017 (FES 2017), with an av­er­age an­nual im­prove­ment in the deficit of less than $0.2 bil­lion over the next five years (Chart 1). And given that the eco­nomic out­look was also broadly un­changed from the fall of 2017, it would be tough to blame some­one for their first re­ac­tion hav­ing been to shrug.

How­ever, that ini­tial im­pres­sion could not have been more wrong. In­deed, the fact that the bud­getary deficits

looked so sim­i­lar to those in the FES 2017 was the first hint that some­thing could be amiss. This in­cludes overly op­ti­mistic rev­enue and spend­ing fore­casts, which leave the fed­eral gov­ern­ment vul­ner­a­ble to sig­nif­i­cant risks that deficits may be much larger go­ing into the 2019 elec­tion than it cur­rently an­tic­i­pates.

Mo’ money, mo’ prob­lems (un­der­stand­ing where it came from).

The start­ing point for un­der­stand­ing the fed­eral bud­get is al­ways the econ­omy. In the past, the cur­rent and for­mer gov­ern­ments have used swings in the econ­omy to jus­tify ad­di­tional spend­ing and/or fis­cal aus­ter­ity, de­pend­ing on the stage of the elec­toral cy­cle and the reign­ing nar­ra­tive of the day.

In Bud­get 2018, there wasn’t much to talk about on the eco­nomic front. Nom­i­nal GDP—the broad­est mea­sure of the tax base—came in an av­er­age of $4 bil­lion lower in ev­ery of the fore­cast than in the FES 2017. Typ­i­cally, this would trans­late into lower av­er­age rev­enues of about $600 mil­lion an­nu­ally.

In con­trast, the fed­eral gov­ern­ment is fore­cast­ing that rev­enues will be higher by an av­er­age of over $300 mil­lion in ev­ery year of the fore­cast be­fore any of the new mea­sures from Bud­get 2018 are ac­counted for. In the near term, “Other rev­enues” have come in much weaker than ex­pected at the time of the FES 2017, and this trend is ex­pected to con­tinue into the com­ing fis­cal year. Em­ploy­ment In­sur­ance (EI) pre­mium rev­enues are also ex­pected to come in mod­estly lower over the course of the fore­cast, al­though this is pro­jected to be off­set by an up­wardly re­vised fore­cast for in­come taxes. And while one can quib­ble over these out­looks, these dif­fer­ences are the stuff of de­bate among a few spe­cial­ists but are clearly tied to changes in the eco­nomic look and mi­nor changes in pol­icy be­tween the FES 2017 and Bud­get 2018.

Where the dif­fer­ences be­tween the fed­eral gov­ern­ment’s out­look for rev-

enues in Bud­get 2018 re­ally jumps out when com­pared to the FES 2017 is in “Ex­cise taxes/du­ties”. In­deed, the fed­eral gov­ern­ment is pro­ject­ing that the tax take in this rev­enue cat­e­gory will be about $0.8 bil­lion higher on av­er­age in ev­ery fis­cal year from 2017-18 through 2021-22 be­fore even ac­count­ing for Bud­get 2018 mea­sures.

So, what’s driv­ing this in­crease? The higher ex­cise taxes/du­ties since FES 2017 can largely be chalked up to stronger growth in the tax­able con­sump­tion base push­ing up the GST. How­ever, since the fed­eral gov­ern­ment does not pub­lish its out­look for tax­able con­sump­tion, there is no way to cri­tique its fore­cast. This lack of trans­parency in the fed­eral gov­ern­ment’s eco­nomic fore­cast means it’s hard to ver­ify whether or not it’s cred­i­ble. But just tak­ing a quick look at the change in pro­jected GST rev­enues makes clear that con­sumers are ex­pected to spend a much larger share of a fall­ing in­come base go­ing for­ward (Chart 2). And this at a time when Cana­dian house­holds are hold­ing record lev­els of debt and in­ter­est rates are on the rise—two down­side risks to the eco­nomic out­look high­lighted in Bud­get 2018 as well as by the Bank of Canada. This new-found GST rev­enue is any­where from 60 per cent to 80 per cent of the change in the gov­ern­ment’s pre-bud­get tax take. So, in re­gard to the GST rev­enue fore­cast, some­thing doesn’t smell quite right.

Be­yond the head-scratch­ing in­crease in GST rev­enues and other ex­cise taxes that seem to be mov­ing the op­po­site di­rec­tion of the econ­omy, Bud­get 2018 also in­tro­duced some new ex­cise tax mea­sures that kept rev­enues still smok­ing. These were higher taxes on sales of to­bacco and le­gal cannabis, which are ex­pected to add a re­spec­tive an­nual av­er­age of about $300 mil­lion and $150 mil­lion to rev­enues start­ing in the 201819 fis­cal year. And, in the case of le­gal cannabis rev­enues, this is only 25 per cent of the es­ti­mated to­tal rev­enues, with the re­main­der go­ing to the prov­inces and ter­ri­to­ries. But these ‘sin taxes’ won’t be enough to off­set the drop-in tar­iff rev­enues as­so­ci­ated with Canada en­ter­ing the Com­pre­hen­sive and Pro­gres­sive Trans-Pa­cific Part­ner­ship (CPTPP), which will see rev­enues fall by over $500 mil­lion an­nu­ally start­ing in fis­cal 2019-20.

For­tu­nately for the feds, higher rev­enues from tax­ing in­come on pri­vate in­vest­ments in­side a pri­vate cor­po­ra­tion and clos­ing tax loop­holes are ex­pected to rake in about $800 an­nu­ally start­ing next year, split roughly evenly be­tween the two. How­ever, as we’ve seen with other in­come tax mea­sures in­tro­duced by this gov­ern­ment, their as­sump­tions may turn out to be op­ti­mistic as peo­ple and com­pa­nies choose to change their be­hav­iour to avoid pay­ing these new taxes. As a re­sult, when com­bined with the rosy out­look for ex­cise taxes, it is dif­fi­cult for one to con­clude any­thing other than the fed­eral gov­ern­ment’s rev­enue fore­cast is high on op­ti­mism.

Big talk on spend­ing, but the talk has been cheap

Call it a mid-man­date mir­a­cle. Be­tween the FES 2017 and Bud­get 2018, the fed­eral gov­ern­ment man­aged to not only find some rev­enue wind­fall but also man­aged to save some money on the spend­ing side. In­deed, Di­rect Pro­gram Ex­penses (DPE)—the dis­cre­tionary part of the fed­eral fis­cal frame­work—is now ex­pected to to­tal nearly $16 bil­lion less, or $2.7 bil­lion lower an­nu­ally, from the 2017-18 through 2022-23 fis­cal years (Chart 3). In the first cou­ple of years of the out­look, the lion’s share of these sav­ings is ex­pected to come from in­fra­struc­ture money left un­spent, which is es­ti­mated to come in at about $2.4 bil­lion lower in fis­cal 2017-18 and 2018-19 than was pro­jected in the FES 2017. The re­main­der of the sav­ings are said to come from lower pro­jected de­part­men­tal spend­ing. While the ex­pla­na­tions are plau­si­ble in the 201718 and 2018-19 fis­cal years, swal­low­ing the story of a dra­mat­i­cally lower out­look for non-in­fra­struc­ture DPE in the outer years re­quires a sig­nif­i­cant leap of faith. This is par­tic­u­larly strik­ing when you con­sider that the down-

ward re­vi­sions in spend­ing in Chart 3 don’t in­clude any new mea­sures from Bud­get 2018.

As a re­sult of this ex­panded fis­cal space thanks to a much lower spend­ing track than was ex­pected in FES 2017, there was plenty of room cre­ated to shrink the deficit over the next few years. But deficits are not a con­cern for the cur­rent gov­ern­ment. In­stead, all of the sav­ings freed up re­sources that were al­lo­cated to $21.5 bil­lion in new pol­icy mea­sures. These were or­ga­nized into vaguely named groups such as “Progress” and “Ad­vance­ment”, which more closely re­sem­ble the names of men’s de­odor­ant scents than buck­ets of fis­cal out­lays.

For the 2017-18 fis­cal year, the big new spend­ing mea­sure was the “Pen­sion for Life” plan, which will pro­vide monthly, tax-free pay­ments for life for vet­er­ans who ex­pe­ri­ence a ser­vice-re­lated in­jury or ill­ness. This equated to a lump-sum ex­pense of $4.2 bil­lion up front, but will re­sult in an­nual sav­ings over nearly $100 mil­lion now and in­creas­ing over the long term. Other spend­ing mea­sures to be lumped into fis­cal 2017-18 in­clude $600 mil­lion for dis­abil­ity/em­ployee ben­e­fits plans for mem­bers of the Cana­dian Armed forces and pub­lic ser­vants, as well as an ad­di­tional $1.4 bil­lion for “nonan­nounced mea­sures”. All in, new spend­ing to­talled $6.3 bil­lion in the cur­rent fis­cal year.

The re­main­der of the $15.2 bil­lion in new mea­sures an­nounced in Bud­get 2018 for the re­main­ing five years of the fore­cast were tar­geted to­ward meet­ing the health, fam­ily and other needs of Canada’s Indige­nous peo­ples ($4.1 bil­lion), in­no­va­tion, skills and sci­ence ($6.4 bil­lion), and trade, labour and in­come taxes (-$1.0 bil­lion, thanks to higher in­come taxes), with the re­main­ing $6.2 bil­lion herded into the catch-all cat­e­gories “Ad­vance­ment” and “Other Bud­get 2018 in­vest­ments”. No­tably, what was not in Bud­get 2018 was a cost­ing of the mea­sures an­nounced to achieve greater gen­der par­ity in the fed­eral sec­tor, par­tic­u­larly as it per­tains to earn­ings.

Taken to­gether, while the head­line bud­get deficit num­bers were noth­ing to write home about, im­por­tant ques­tions re­main. For in­stance, given the weaker eco­nomic out­look, why the op­ti­mism on rev­enues? Where did all of the sav­ings come from for DPE, and are these sus­tain­able? Against the back­drop of an econ­omy that is es­sen­tially as good as it gets, both of these out­looks seem overly op­ti­mistic. And with­out trans­parency around the de­tails of how these fore­casts were reached, one can­not say with con­fi­dence that they are cred­i­ble.

Par­lia­men­tar­i­ans need and de­serve this in­for­ma­tion around tax­ing and spend­ing to hold the gov­ern­ment to ac­count. With­out it, they can’t ful­fill their con­sti­tu­tional obli­ga­tions.

Adam Scotti photo

Fi­nance Min­is­ter Bill Morneau and Prime Min­is­ter Justin Trudeau leave the PM”s of­fice to de­liver Bud­get 2018 on Fe­bru­ary 27.

Chart 2: REV­ENUE CHANGES SINCE THE FES 2017

Chart 1: EVOLV­ING EDERAL BUD­GET DEFICIT OUT­LOOK

Chart 3: RE­VI­SIONS TO THE SPEND­ING OUT­LOOK SINCE FES 2017

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