As an economic slowdown bites into government revenue, the anti-tax hike Conservatives will resort to slashing more programs in Thursday’s budget to balance the books by 2015.
But why are the Tories so bent on that goal at any cost?
There is no pressing economic need for a balanced budget in the next two years; it will make little difference for Canadian households whether it takes another year or two, economists say. Instead, the 2015 target may be pivotal for the Tories for another reason: a successful re-election campaign.
Canada is due that year for its next election – one that, if won by Conservatives, would see them holding the reins of power for more than a decade.
While balanced books may not seem like the sexiest election issue, it opens the door for two key Conservatives promises: a $2.5-billion tax break allowing parents to split income and doubling the $5,500 contribution limit for tax-free savings accounts.
Finance Minister Jim Flaherty revealed projections in November that indicated the deficit will be significantly higher in each of the next four years and will not be completely eliminated until 2016-17. Despite what those numbers suggested, Flaherty and Prime Minister Stephen Harper have since insisted that the government can balance the budget by 2015.
The Conservatives are standing by that plan even as economists downgrade 2013 growth expectations from the two per cent projected in November, a problem that Finance Minister Jim Flaherty has said could cause a “significant” hit to government revenue this year.
Reports suggest weaker gross domestic product growth could add another $2.1 billion to the shortfall expected in 2013.
“In the face of a fragile global economy, the Harper Government is preparing for the upcoming budget with a focus on supporting economic growth and job creation and returning to balanced budgets by 2015,” Finance Minister Jim Flaherty said when he announced the date for budget delivery last week.
One reason for their confidence is Ottawa’s $3-billion contingency fund that could cover the shortfall if the 2015 deficit remains lower than that reserve.
Parliamentary Budget Officer Kevin Page has another reason for their optimism: Ottawa may be overestimating the hit to revenues from the economic slowdown, giving itself the opportunity to surprise voters with good news prior to the election.
November’s 2012 deficit projection of $26 billion now appears too high based on government fiscal updates from the first nine months of the year, RBC said in a budget preview that suggested the 2012/13 deficit could be closer to $20 billion.
A balanced budget indicates responsible money management. Just as households must pay more down the road when they borrow to subsidize costs, governments also run the risk of racking up dangerous levels of debt that can lead to economic ruin (see: Greece).
But critics argue that, when the economy is struggling to grow, it is safe to delay the goal of a balanced budget in order to tackle more immediate challenges, such as high unemployment and low productivity, and it is exactly the wrong time to introduce austerity measures that will further inhibit growth.
Flaherty has been clear that he has no intention of ramping up spending to stimulate the economy, or of introducing any tax increases, and that, instead, he will trim further to meet his 2015 target for a balanced budget.
Craig Alexander, chief economist at TD Bank, said the question is not whether the government can achieve the 2015 target, but “how much restraint on spending are they going to have to apply in order to achieve that goal?”
He said there is no “economic imperative” to create a balanced budget by 2015, given that the country’s balance sheet remains the envy of the industrialized world.
“Whether there’s a small deficit or small surplus in 2015 or 2016 really is not that important. It might be important from a political view; it’s not that important from an economic perspective.”
Even conservative columnist Andrew Coyne wrote in the National Post that he cannot see it “mattering much either way” if the deficit is not eliminated in 2015.
However, Gregory Thomas, federal director of the Canadian Taxpayers Federation, said that the government risks raising the ire of Canadian taxpayers if it doesn’t meet the 2015 target.
For his group, a balanced budget is about not just fiscal prudence but also ensuring that the government keeps its election promises to allow income splitting and raise the TFSA limits.
“They said both of those things had to wait until the budget was balanced, and we’re kind of sick of waiting,” he said.
The finance minister has said he will not touch transfer payments to provinces and territories for education and healthcare, which account for about one-third of budgetary spending. He also plans to maintain spending on individuals such as seniors, people with disabilities and children – another third of the budget.
So the government is left to cut discretionary spending, the remaining third of the budget.
There are indications that the defence budget could see another $32 million cut and that restraint could be extended to areas such as environmental regulations and border security, among other government programs. The only revenue-raising measures are expected to come from closing tax loopholes, according to the report by RBC Economics.
With just a small pool for spending, the government is expected to reallocate funds to areas of priority. Reports suggest that it will focus on infrastructure spending and skills training to better match unemployed workers to available jobs.
And although investing in infrastructure and skills training will not solve the country’s bigger problems of weak productivity and competitiveness, Alexander said, it will help to alleviate some of those challenges contributing to slow growth.
“The government has very limited fiscal room to work with,” he said. ”They aren’t going to have a lot of money to announce big programs, so they really have to pick their spots.”
Balancing a budget is a daunting task, with any government facing pressure from fiscal conservatives calling for further slashes and liberals calling for increases in spending.
Take the very different shadow budgets proposed by right-leaning C.D. Howe Institute and left-leaning Canadian Centre for Policy Alternatives.
The C.D. Howe plan suggests the government could return to surplus by 2014-2015, a year ahead of the plan, through further belt-tightening.
The government needs to keep that balanced books target before the election in order to honour its promises and avoid alienating potential Conservative voters, said Alexandre Laurin, C.D. Howe’s director of research.
“If you want greater accountability of government, it’s better that it’s within the mandate, because then governments can be held accountable,” he said.
Still, Laurin concedes one year of delay toward a balanced budget “will not make a huge difference.”
“The importance here is we need a target. If you target four or five years from now, many things can happen and you may never reach a surplus. You need to do what is necessary to get to your goals.”
Meanwhile, the CCPA believes its proposal can achieve a balanced budget by 2016, a year later than the government plans, while avoiding “growth-killing austerity” measures, which it points out have done little in Europe but help sink economies while driving up deficits as government revenues collapsed.
“We have a huge amount of fiscal room at a time when we could be doing a lot more at record low interest rates to invest,” said David MacDonald, senior economist at the CCPA.
“Our debt burden is going down over this whole period despite the fact we're running these small deficits, so it’s not really an economic issue. Deficits for the federal government at this point are an electoral issue.”
He accused the government of cutting crucial services so high income earners can get tax breaks ahead of the election, adding that the TFSA changes will also mostly benefit those with large bank accounts.
“They promised they’d balance the books before they’d enter new measures that would unbalance them,” he said, referring to the income splitting and TFSA pledges.
Still, TD's Alexander noted that there may be some austerity measures in the budget, but not to the degree seen in other countries around the world.
For example, he said, the heavy-handed spending cuts mandated in the U.S. are expected to slow growth by 1.3 percentage points this year, while restraint in Canada is expected to hit the economy by a much smaller 0.5 percentage points.
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Posted: 03/21/2013 5:24 am EDT | Updated: 03/21/2013 2:45 pm EDT