Ottawa using bounty of robust growth to simply boost spending

The recently-released 2018 federal budget calls for growth in both spending and revenues.

Between 2017-18 and 2022-23, total revenues are forecast to grow from $309.6 billion to $373.9 billion—an increase of 21 per cent. After a three-year period of rapid growth from 2014-15 to 2017-18 that saw total federal spending grow more than 17 per cent, total expenditures are expected to grow more modestly from $329 billion to $383.3 billion for a projected increase of just over 16 per cent over the next five years.

After a $3 billion “risk adjustment” is factored in, the deficit is forecast to be $18.1 billion in 2017-18 and is expected to decline ever so slowly to $12.3 billion by 2022-23. As a result, the net debt will continue to rise, climbing from $714.5 billion in 2016-17 to $831.5 billion by 2022-23.

It’s remarkable that despite what has been a relatively strong economy, there has not been an effort to do more to speed the return to a balanced budget. Indeed, when you compare the 2018 budget to what was laid out in the Fall 2017 Economic Statement, the Trudeau government has decided to use the bounty of more robust growth and increased revenues to simply boost spending.

The first chart below compares the projected average annual growth rates across the 2018 federal budget and the Fall 2017 Economic Statement for the period 2017-18 to 2022-23, for the key summary budget numbers.

The projected average annual growth rate for total budgetary revenues has risen from 4.0 per cent to 4.1 per cent while total spending goes from 3.4 per cent to 3.5 per cent. More interesting is that the projected growth rate of public debt charges—already at 5.3 per cent—is now up to 5.5 per cent. Indeed, the annual growth rate of public debt charges is now expected to be among the fastest-growing items of federal spending.

Revenue is anticipated to grow faster than spending, but as the second chart shows, it will be personal income tax revenues that the budget expects to grow the fastest, as a result of economic growth projections and recent changes to the personal income tax system.

In the Fall 2017 Economic Statement, total tax revenues over the period 2017-18 to 2022-23 were expected to grow at an annual average rate of 4.1 per cent, but the 2018 budget now places that at 4.2 per cent. However, the average annual growth rate for personal income tax revenues, which account for half of total federal revenues now, goes from 4.7 per cent to 4.8 per cent.

To put the growth of federal personal income tax revenues in economic perspective, in federal budget 2018, the nominal GDP growth rate over the period 2017 to 2022 is forecast to range from a high of 5.2 per cent in 2017 to a low of 3.5 per cent in 2019, for an average of 4 per cent.

Therefore, federal personal income tax revenues on average are projected to grow at a faster rate than the economy for the next five years, and the federal personal income tax-to-GDP ratio will rise from about 7 per cent to nearly 7.5 per cent.

So, what’s the main takeaway here?

The shape of federal fiscal things to come is continued deficit financing during a period not expected to be marked by recession. The federal government has chosen to continue spending more than it takes in, despite the recent relatively favourable economic performance.

We will see another $117 billion added to the federal net debt and this will be accompanied by an increase in the personal income tax burden, as measured by the share of federal personal income tax revenues- to-GDP. Clearly, using the bounty of favourable economic performance in this manner is not sound stewardship of the public purse.