Last week in Brampton, Ont., Prime Minister Stephen Harper delivered some good, if surprising news, about Canada’s fiscal situation. Here’s the transcript (my emphasis):
I want to draw your particular attention to the numbers, the one between the dotted lines there for last year, the year completed, 2013-2014. That has been our estimate until today. That has been our estimate of the deficit last year and coming up after that of course this year, 2014-15, we still have a small deficit and are projecting surpluses after that.
In the budget we were projecting that the deficit for this, the fiscal year just completed would be $16.6 billion. I’m now able to tell you that that number is likely to be significantly lower – $5.2 billion.
What does this mean? It means a couple of things. It obviously means we are clearly returning to a balanced position.
Some of the improvement – let me be clear, friends – some of the improvement here, a significant part of it is due to one-time factors. So you won’t see all of this projected forward into the future, but some of it clearly will be. And so as I say our certainty that we’ll move to surplus in 2015 will continue to be the case obviously.
I also want to say this however: The government has no plan or no intention to move this year into a surplus. We continue to intend to run a small deficit this year before returning to surplus. We also intend however to move quickly to implement promises that we made to Canadians during the last election campaign.
Just also to tell you how we achieved this, I think it’s important you know how we’ve managed to achieve this because as I said we have cut tax rates. What have we done on the spending side to get this balanced budget? We have controlled our spending. Let’s be clear what spending we have controlled and what we haven’t. We did not reduce transfers to other levels of government. We didn’t cut funds for healthcare and education, as was done in the 1990s. In fact those numbers not only continue to grow at healthy rates, they continue to grow at the present time at rates much higher than actual increase in provincial spending in those areas.
Yesterday, the Department of Finance confirmed that figure and provided some more background.
Today, in his morning note, BMO Capital Markets Robert Kavcic reviews the figures from Finance and figures the PM may be a little overcautious and that Canada will be in the black this year, not next year (The emphasis here is from Kavcic).
As Prime Minister Harper hinted last week, Ottawa reported a $5.2 billion budget deficit for FY13/14, a sharp improvement over the prior year ($18.4 billion) and much smaller than expected in the 2014 budget ($16.6 billion). As expected, there weresome one-time factors at play that helped shrink last year’s deficit, including asset sales (GM shares and some real estate), assessments of non-resident income taxes and penalties for other prior-year reassessments, and a lower-than-expected Alberta flood bill. All told, these items amount to something in the neighbourhood of $5 billion, and if left out of the calculation, would leave the year-over deficit improvement roughly in-line with the pace seen in the prior two fiscal years. Beyond the one-time items, there was some real underlying improvement in revenues and spending as well, even better than expected at the time of the 2014 budget. If any of that is allowed to carry through to the current fiscal year, and if the $3 billion cushion is not needed, Ottawa will be looking atbalanced books (or better) before this fiscal year is up.
BMO is slated to publish its analysis of federal finances. In the meantime, here’s the highlights from a research report published today by a trio of economists at TD Bank, including senior economist Randall Bartlett, who, before joining Bay Street, worked for the Parliamentary Budget Office and the Department of Finance. Here’s what Bartlett and his colleagues wrote:
As has become the broad consensus among economists and commentators, Canada’s federal government’s books are poised to tip into surplus in fiscal 2014-15. We estimate a surplus of around $5.0 billion this year, a considerable improvement from the $2.9 billion deficit projected in Budget 2014. This improved showing is on the back of a better-than-expected hand-off from fiscal 2013-14 as well as stronger economic growth than forecast in Budget 2014.
• TD Economics projections show that the government will have around $56 billion in cumulative surpluses over the next 5 years to divvy up across tax cuts, new spending and/or debt reduction. We also expect that the government will easily meet its stated 25% debt-to-GDP target over the forecast.
• While this surplus room may seem substantial at first blush, it pales in comparison to those in the 1990s, when an improved global economic environment and falling interest rates led substantially larger surpluses. Case in point, in the 1999 Fall Update, the federal government at the time projected a surplus of 2% of GDP after five years, about three times our current 5-year forecast.
• As such, the government will need to manage expectations for revenue reductions or spending increases. For instance, we project that introducing the government’s 2011 election commitments will chew through nearly $20 billion by fiscal 2019-20, or about one-third of the projected total surplus. Promises of tax relief will compete with pressure for new spending and reduced debt. Tough choices will need to be made.
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A surprise? This budget surplus is no surprise. We’re heading towards an election and Harper thinks he can bribe voters with a sudden budget surplus. The difference is that this time Canadians won’t be fooled!