Last week, Finance Minister Jim Flaherty announced that this year's deficit would be $50 billion but, notably, he did not alter future year forecasts and he stuck to his budget forecast that the federal books would be balanced again 2013-2014. Prime Minister Stephen Harper has repeatedly vowed that his government will never run “a structural deficit”. As he has explained it, a structural deficit is one that would persist even economic growth returns to normal levels.
The government's plan to avoid a structural deficit is, essentially, to keep spending relatively stable and then wait for tax revenue to rebound once the economy rebounds.
But TD Bank, whose chief economist is Don Drummond who spent more than two decades as a Department of Finance bureaucrat who was involved in the preparation of many federal budgets, takes a look at Flaherty's updated figures and concludes that the deficit will not disappear on its own by 2014 even though the economy should be resuming normal growth. Indeed, by 2014, when Flaherty says the budget will show a surplus, Drummond (and his associate Derek Burleton) say the deficit will be just shy of $20 billion that year. (The federal debt will have climbed from less than 30 per cent of GDP to 34.4 GDP, TD says.)
So if the prime minister says a “structural deficit” is one that exists in times of normal growth and if Drummond's forecast includes persistent deficit, then, presumably, the Harper government now owns a structural deficit.
There are only two ways to get rid of a structural deficit and both Harper and Drummond agree on this point: A government can raise taxes or it reduce spending. Or to use economist-speak, “balancing the budget is elusive unless changes to the policy parameters are undertaken.”
So Prime Minister – which policy parameter is it going to be? Tax hikes or program cuts?
Come to think of it: Probably a good idea about now to put the same question to Mssrs. Ignatieff, Layton, and Duceppe!