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National Opinion Centre

On April 19t Minister Freeland delivered her long awaited budget- the government’s first budget in two years. By some measures, it was an impressive document: 740 pages long making it the longest budget document ever.

The budget can best be described as a “big announcement” budget with proposed spending initiatives sprinkled around to everyone and to everywhere. In its 11 chapters’ covering 320 pages, there were over 230 new spending proposals, adding up to $143 billion over six years. These spending proposals came to $7.7 billion in 2020-21, $49.3 billion in 2021-22, falling to $28.3 billion in 2022-23, then to $23.8 billion, $17.7 billion, and finally to $16.1 billion in 2025-26. This amounts to between 10 per cent of total program expenses in 2021-22 and to 3.7 percent in 2025-26. As a share of GDP, total program spending is now forecast to decline steadily from 27.9 per cent in 2020-21 to only15.0 percent in 2025-26. By comparison program spending was 14.1 per cent of GDP  before the pandemic.

There is no mention of a fiscal anchor in the budget, because there was no need for one. The projected spending track combined with  (a perhaps overly optimistic) projected revenues, results in a deficit of only $30.7 billion or 1.1 percent of GDP in 2025-26. Simple extrapolation would suggest that the deficit would be eliminated in about five more years. Even the debt-to-GDP ratio is forecast to decline, albeit not by much. This does not mean the government is committed to this deficit track, as an anchor, but the deficit track is bound to act as a constraint on future spending decisions. Nevertheless, the government has not made deficit elimination a priority and it is highly unlikely that this government will ever present a balanced budget.

Minister Freeland has put together a very smart political and policy budget. She has focused, quite correctly, most of the new spending on pandemic support and economic recovery in the first three years; in the last three years of the projection new spending drops off dramatically. At the same time, she has made a lot of small spending proposals, that will make a lot of people and stakeholders very happy without costing the government very much money; a big political payoff for a few dollars.

She has, nevertheless, looked beyond the short term, and committed to one major new long-term policy action, a national childcare program, that will have significant long-term social and economic benefits. And finally, perhaps unintentionally , she has created a fiscally conservative budget framework. A key question is will financial and exchange markets be satisfied? So far the answer seems to be yes; the exchange rate continued its strengthening trend after the budget. . There are of course risks to this fiscal strategy. The economic assumptions could turn out to be wrong and there will certainly be policy pressures that she will have to deal with.

As in previous budgets, the key aggregate economic assumptions are based on an average of private sector economic forecasts.  The details underlying these major aggregates are derived by the Department of Finance.  It would be a major improvement in budget transparency, if these details were provided in the budget. Real economic growth is projected to increase by 5.8 per cent in 2021, following a decline of 5.4 per cent in 2020. Over the 2020 to 2025 period, real economic growth is projected to average 1.7 per cent per year, in line with its longer-term potential economic growth.

GDP inflation is expected to advance 3.3 per cent in 2021 before stabilizing at 2.0 per cent thereafter.  As a result, nominal GDP – a broad measure of the government’s potential tax base – is expected to increase by 9.3 per cent in 2021, but declining to only 3.8 per cent over the 2020-25 period. The economic assumptions are broadly in line with those projected in the Parliamentary Officer pre-April budget report.

Annex 1 provides some “traditional” impact analysis of changed economic assumptions, including a 1-percentage point decrease in real GDP growth, a 1-percentage point decrease in GDP inflation, and lastly a 100-basis point increase in all interest rates. In general, the impact in all three cases is rather small, between $2.1 billion and $4.9 billion in 2025-26.

At any moment in time, the list of internal government spending pressures is always very long. The job of the finance minister, hopefully with the backing of the Prime Minister, is to set priorities and keep the list short; not an easy job. It would appear that additional spending for healthcare (CHT) has already moved to be number one on the priorities list. The Prime Minister has committed to new health spending once the pandemic is over. Just how much new spending remains to be seen, but it will likely be significant and ongoing. This new funding should be deficit financed, since a healthy population means a more productive labor force.

The Minister will have to reform the EI system. The government froze EI premium rates for three years as part of its response to COVID-19. The budget now assumes that EI premium rates will rise from $1.58 per $100 of insurable earnings in 2022 to $1.83 in 2025. But this increase in the premium rate is not intended to cover any EI-Emergency Response Benefit costs. These have to be paid for by a credit from government revenues to the EI Operating Account of about $26 billion. The government indicated that it would undertake consultations as to how to set premium rates in the future. Past governments have tried to reform the EI system but usually with little success.  EI reform will be more difficult today because of the need for the reforms to take into account the une

There is an “elephant in the budget room” that won’t, and shouldn’t go away. This relates to the issue of intergenerational fairness. If the government plans to embark on a longer-term policy agenda of “bigger government” then they need to ask who should pay for it. Should current taxpayers pay for it through higher taxes and lower spending or, should future generations pay for it through higher debt, higher debt interests costs and maybe even fewer opportunities.

This question needs to be asked and answered.  Just because interest rates are low today does not mean the government should always borrow to pay for its new spending. In the budget COVID debt is already being shuffled off onto future generations even though they will receive no benefit from it.

The government likes to talk about fairness but unfortunately not for future generations. If current spending has a long-term payoff in terms of higher productivity and economic growth then borrow to pay for it; if it doesn’t then current taxpayers should pay for it.

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.

Their Blog is 3dpolicy.ca

The views, opinions and analyses expressed in the articles on National Newswatch are those of the contributor(s) and do not necessarily reflect the views or opinions of the publishers.
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