Budget 2018 Holds The Line, But We May Need To Pay Up Later

Federal budgets are fiscal plans. They tell parliamentarians and Canadians how the government plans to manage the nation’s finances given the state of the economy and reasonable assumptions about the outlook and risks. So, how does Budget 2018 measure up?

Budget 2018 largely meets expectations shaped by the government in recent weeks. Modest fiscal allocations sprinkled over 100-plus initiatives. These new investments total a little more than $20 billion over five years — something in between monies provided in budgets 2016 and 2017. The big allocations of the fiscal largesse go to science and innovation, and monies to support Indigenous peoples and veterans.

As promised, the government continues to strengthen its gender-based analysis and approach. The projected deficit continues its downward path over the medium term from just under $20 billion in 2017-18. The government’s fiscal target of reducing the debt-to-GDP ratio from current levels is achieved. From this perspective, there are not too many surprises. Best to avoid surprises when dealing with taxpayer money.

The state of the economy is strong. The prime minister and finance minister inherited an economy with little or no growth in 2015. In 2017, real GDP is expected to have grown three per cent on an average annual basis. That is a very strong number. The unemployment rate currently sits below six per cent. That is a very strong number. Deficit-financed programs for child benefits and public infrastructure have added to the economic growth rate. It is a good time to be a finance minister.

The economic assumptions underlying the fiscal projections are drawn from a survey of private-sector forecasters. They are reasonable in that planned real GDP growth returns to its longer-term trend. Inflation rates and interest rates are assumed to remain moderate. It is a Goldilocks scenario. Imagine if we asked the finance minister in 2015: “Would you take a three-per-cent real GDP growth rate in 2017?” He would say: “Where do I sign?” In the same way, the finance minister would love to realize an outlook of continuous growth and very modest increases in interest rates. The finance minister has wisely kept a small economic reserve to help offset shifts in the outlook. It amounts to $3 billion on the budgetary balance or about $20 billion in nominal GDP. A small reserve is better than no reserve.

On risk management, the document is weak. The 2018 budget weighs in at a hefty 370 pages, and there really is only one page on economic risks — a paragraph on NAFTA negotiations; a paragraph on high household debt and growing concerns about housing affordability. There is little to no analysis around fiscal risks. What is the plan to hold government operations spending essentially flat for five years? There is no plan in the document. Infrastructure spending continues to lapse in high amounts. While creating fiscal room in the short term, lapsed infrastructure authorities boost spending over the medium term.

Why are these numbers so large? No explanation. There is no discussion on national defence spending, yet procurement issues around military equipment frequent national newspapers. What is the fiscal plan to move forward on the national defence strategy? There is an initiative to examine the development of a national pharmacare program. This is a program that could cost tens of billions of dollars. Will the government raise taxes? Significant performance commitments are highlighted to reduce gender equality. Could we really reduce wage and participation gaps without a strong childcare program?

The fiscal planning framework in Budget 2018 is essentially the same as presented by the finance minister in his fall 2017 fiscal update. As noted, the budgetary deficit and debt-to-GDP ratios decline over the medium term. By itself, this is a relatively strong framework, or at least nothing to lose sleep over if you are a fiscal geek.

There is some magic in the numbers. While the key economic assumptions — such as nominal GDP and interest rate projections — are essentially unchanged from the 2017 fall update, the government finds about $20 billion in largely unidentified planned spending over the next five years. Again magically, this is roughly equivalent to the $21 billion in new spending measures announced in the budget.

Apparently, the money is found in something called direct program spending. These are expenditures allocated for departmental grants and contributions, capital and operational spending. Again, ironically and magically, it is the slowest growing spending component in budget 2018 over the next five years. To be honest, this is an area where the budget does not measure up.

Is it responsible to run a federal budgetary deficit equivalent to about one per cent of GDP when the economy is so strong — operating near its potential? My guess is that there is going to be a political debate in 2019 in the lead up to the next federal election on fiscal responsibility. The Liberals will say it is responsible. The proof, they will argue, is in stronger economic outcomes. The Conservatives will say it is not responsible. The NDP and Green Party may say the issue is much bigger — we need tax reform that will generate additional revenues and new policy directions.

The fastest growing spending component in Budget 2018 is interest on the public debt. The Visa card for the government of Canada will grow by about 35 per cent over the next five years. Total program spending will grow by about 15 per cent. Yes — the debt numbers and carrying cost of debt numbers look reasonable when deflated by the assumption of strong and stable GDP growth numbers, but it is a mistake to say that you can run deficits year after year and there is no fiscal planning impact.

The next generation will pay much higher interest costs. Future finance ministers will lose fiscal room to manoeuvre. How does the budget measure up on deficits and debt? You decide. Do you like the programs the government is offering? Are we generating good debt or bad debt? My guess is fiscal responsibility will be an issue in the 2019 federal election.