The 2018 Economic and Fiscal Fall Update together with Budget 2019 represent the beginning of the 2019 Liberal election platform. It is also the beginning of a major headache for the “deficit elimination” Conservatives. The Harper government, after all, failed to eliminate the deficit over eight years, despite cutting spending in successive budgets. What would Mr. Scheer do to eliminate the deficit that the Harper government hasn’t already done?
The Liberals have been the beneficiaries of major “unexpected” revenue gains since the 2018 budget, nearly $45 billion between 2018-19 and 2022-23. They have deliberately chosen to use all of it, and more, largely on corporate tax cuts in the November 2018 Fall Economic and Fiscal Statement, and new spending for just about everyone in the March 2019 Budget. None of the unexpected revenue was used for deficit and debt reduction. This should not surprise anyone. This has been the Liberal fiscal strategy since the 2016 budget.
During the 2015 election, the Liberals committed to short-term deficits of $10 billion and deficit elimination by 2019-20. This commitment was based on the overly optimistic economic assumptions for oil prices and nominal GDP growth used in the last Harper Conservative budget.
As it turned out, oil prices and nominal GDP declined significantly in 2015 and 2016 resulting in a significant decline in revenues and considerably higher deficits in the 2016 budget. This illustrates the folly of attempting to set a specific date for deficit elimination. There are simply too many uncertainties at play over which the government has no control. Any plan to eliminate the deficit with these new economic assumptions would have required trashing much of the Liberal election platform.
This decision was a no brainer; deficit elimination went into the policy trashcan in the government’s 2016 budget. This is equivalent to Jean Chretien’s commitment in the 1993 election, to eliminate the GST.
As a fiscal anchor deficit elimination was quickly replaced with a new fiscal anchor, to maintaining a declining debt-to-GDP ratio. The Liberals have succeeded in maintaining this commitment, despite running deficits that temporarily reached as high as $19 billion in both 2016-17 and 2017-18.
In the 2019 budget, the deficit is estimated at $14.9 billion in 2018-19, but then rises to just under $20 billion in the next two tears before falling steadily to $9.8 billion in 2023-24. The projections from 2020-21 to 2023-24 include a risk adjustment factor of $3 billion per year. In each year, the deficit is still less than one per cent of GDP over the forecast period. In the last year, the deficit is 0.4 per cent of GDP. This is pretty close to deficit elimination. The debt-to-GDP ratio continues to decline over the forecast period.
In fact, the budget deficit could actually be lower than forecast. In our view, the 2019 budget revenue forecast is based on overly pessimistic “tax elasticity assumptions”. A tax elasticity measures how much government revenues would increase for a given increase in the tax base (e.g., personal income or nominal GDP). The budget assumes a personal income elasticity averaging about 0.5 per cent, which is low by historical experience.
If we were to use a tax elasticity of 1% (based on historical experience) for personal income tax, and let corporate income tax and GST move in line with the growth in nominal GDP, total government revenues would be higher by $1.3 billion in 2020-21, $1.7 billion in 2021-22, $5.2 billion in 2022-23 and $6.6 billion in 2023-24. This would be more than enough to fund a political platform (e.g., pharmacare) or if needed to protect (along with the $3 billion risk adjustment), the fiscal framework from a slowdown in economic growth. One can only speculate as to why the Finance Department used such low tax elasticities in preparing its forecast.
During the 2015 election campaign, we made three important recommendations. First, we recommended that the Parliamentary Budget Officer (PBO) do a costing of the election platforms of all major political parties. Second, we recommended that the PBO provide a forecast of the economic and fiscal projections for political planning purposes. Thirdly, we recommended that the risk adjustment factor, or contingency risk factor, not be used to fund new policy initiatives. If not required to offset the impact of adverse economic developments on the budgetary balance or errors in translating the economic assumptions into fiscal projections, it be used to reduce the federal debt. The Liberals have only adopted the first recommendation.
Given that there will be no update of the economic and fiscal projections by the Government prior to the 2019 election, the PBO should be requested to provide such an update a month before the election date. This would provide a non-partisan forecast that could be used to assess the impact of the policy platforms of all major political parties on the budgetary balance.
C. Scott Clark held a number of senior positions in the Canadian Government, including Deputy Minister of Finance from 1998-2001. He has a PhD in Economics from the University of California at Berkeley and is currently President of C. S. Clark Consulting.
From 1990 to 2005, Peter C. DeVries served as Director, Fiscal Policy Division, at the Department of Finance. In that capacity he was responsible for overall preparation of the federal budget. He is currently a consultant in fiscal policy and public management issues.
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