What’s the source of the federal deficit?: Speer for Inside Policy

A post-budget debate has ensued about the source of Ottawa’s deficits, writes Sean Speer for Inside Policy.

By Sean Speer, March 6, 2018

Last week’s federal budget projects annual deficits for the foreseeable future. The deficit for the current year is even set to grow relative to last year. Red ink is the distinguishing mark of the Trudeau government’s fiscal policy.

A post-budget debate has ensued about the source of Ottawa’s deficits. The government and some of its supporters have pointed to a $70 billion drop in nominal GDP between budgets 2015 and 2016 as the principal source of its fiscal gap. Its critics have highlighted large-scale spending increases as the main cause of its budgetary challenges.

Who is right? What does the fiscal data tell us?

The best way to test these different perspectives is to compare the Harper government’s final budget in 2015 to the Trudeau government’s recent one. This enables us to see what budget inputs – including projections for revenues, program spending, and debt-service costs – have changed. Basically, it helps us to isolate the extent to which these different factors are driving the changes in fiscal outcomes.

The below table sets out the budget projections for the 2018 Budget and 2015 Budget for the fiscal period between 2015/16 and 2019/20. It excludes subsequent periods because they were not yet covered in the 2015 Budget.

The next table compares the differences between the two budgets across these various inputs and indicators to understand what has changed between the two. This can help us to understand what factors have driven the change in Ottawa’s fiscal bottom line between Mr. Harper and Mr. Trudeau.

The 2016/17 differences generally affirm the government’s position. Revenues fell by $9 billion that year relative to what the 2015 Budget had projected. It is a sizeable drop representing more than 3 percent of total revenues. This means that irrespective of which party had won the 2015 election any government would have had to deal with a considerable fiscal gap and likely run a budgetary deficit. The government’s critics must acknowledge this point.

The story in subsequent years is less forgiving of the government. Revenue projections have been revised downward a bit relative to the 2015 Budget. But these downwards revisions only represent about 1 percent of total revenues. It is thus less a significant revenue drop and more a case of the usual churn evident in budget forecasting.

It is also important to note that these revenue changes are also offset or nearly offset by lower debt charges. Look at 2018/19. Revenue projections are now $2.7 billion lower than in the 2015 Budget, but debt charges are $4.2 billion lower. The result is that the government’s fiscal position is actually $1.5 billion better than in the 2015 Budget before any incremental spending.

The point is that the government’s departure from its election commitment of three, $10 billion deficits is mostly a result of discretionary spending choices and not uncontrollable economic or fiscal changes. Those pointing to the post-2015 Budget drop in nominal GDP are overstating their case.

As for the composition of this discretionary spending, it seems increasingly clear that it is comprised less and less of infrastructure spending. The 2018 Budget provides an update on the “reprofiling” of infrastructure funding and the trend of pushing resources into subsequent years continues unabated. Nearly $5 billion is being delayed from 2017/18 and 2018/19. That is on top of roughly $2 billion from the previous year. Some has even been completely reallocated to fund non-infrastructure priorities such as veterans benefits.

This is not necessarily a critique of infrastructure delays or veterans programming so much as it is to emphasize that the deficit is less about infrastructure spending and more about run-of-the-mill spending on various government priorities. One can of course agree or disagree about the utility of this spending. The point is the notion that incremental spending is principally about infrastructure investment is also overstated. This does not even account for the extent that the infrastructure spending that is occurring involves a loose definition of “infrastructure.”

What is the key takeaway? The good news is that fiscal improvement is entirely within Ottawa’s control. The bad news is it will require a deviation from recent fiscal behaviour. Until then the budget will continue to be written in red ink.

Sean Speer is a Munk Senior Fellow at the Macdonald-Laurier Institute.