Budget 2016—spending is driving the deficits
Leading up to their first budget, the Liberals argued that deteriorating economic conditions would require the government to run much larger deficits than had been promised. And the budget did indeed produce bigger deficits. But deteriorating economic conditions and resulting weakness in revenue growth aren’t why the federal government will be in deficit in the years ahead. The real source is a marked increase in spending.
It’s true that projections for a slower growing economy this year are causing government revenues to be lower. However, some context is necessary to understand the modest scale of the revenue decline. Consider that in 2016/17 federal revenues are projected to be $3.5 billion lower than in the previous year—a drop of just 1.2 per cent. By comparison, federal revenues fell by $15.2 billion (6.4 per cent) in 2009/10 when the economy was actually in recession, which it is currently not.
And according to the government’s revenue projections, $2.7 billion (or nearly 80 per cent) of the $3.5 billion revenue reduction is due to a one-time reduction in revenues from Crown corporations, not a weak economy.
Can the $3.5 billion projected decline in revenues be blamed for the emergence of a $29.4 billion deficit?
Hardly. The reason for the larger deficits is that the Liberals have decided to push ahead with dramatic spending increases.
In 2016/17, the government proposes to increase program spending by $20.5 billion—a 7.6 per cent jump. This increase is even more dramatic considering that program spending in 2015/16 is up 6.7 per cent from the previous year.
The government plans to follow these two consecutive years of marked spending growth with yet another big increase in 2017/18, increasing program spending by 4.5 per cent. All told, by 2017/18 spending will be up by some $50 billion from 2014/15 levels, representing a jump of 20 per cent.
With the dramatic run-up in spending announced in the budget, there has been an increase in the size and persistence of the federal deficit, which will at best total $113.2 billion over five years. Indeed, there are clear risks to this plan that would see much larger deficits and debt than projected.
The return to persistent deficits poses a number of problems. For instance, routine deficits incurred during periods of economic growth, which is what the Liberals plan for the years ahead, puts the country’s finances at risk should the economy experience a significant slowdown or recession. An unexpected shock can alter the fiscal outlook, and if the government is already in a deficit position when a recession hits, the result can be much larger budget shortfalls than anticipated and a rapid run-up in debt. Canada’s history on government finances is telling about how such a scenario can unfold.
As troubling as all this is, it’s made worse by the fact that the budget presents no plan to return to a balanced budget. In fact, the government projects a deficit of $14.3 billion in 2020/21—a year after its current mandate is over. In other words, the budget leaves the task of balancing the books to the next government.
The government has tried to convey the message that poor economic conditions and weak revenue growth made large deficits inevitable. The budget contradicts this rhetoric. The reality is that rapid spending growth over the next several years is responsible for the larger deficits and run-up in debt now projected to occur. Canadians will pay the price for the choices made in this budget for many years to come.
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