Budgets are political and aspirational documents as they lay out a future course for the economy and government revenues and expenditures much as the government of the day would like them to be. Well, the 2013 federal budget is no exception as a bit of additional study of the budget numbers suggests that balancing the budget by 2015-16 and generating surpluses thereafter is probably wishful thinking.
For the budget to balance, revenues need to grow faster than expenditures. The speed at which that occurs affects the time needed to arrive at a balanced budget. Indeed, the 2013 federal budget forecast is for quite robust revenue growth well in excess of the growth rate of expenditures. For the period 2012-13 to 2015-16, the federal budget projects that total budgetary revenues will grow at an average of 4.7 percent annually while expenditures will grow at an average of 2.0 percent – a gap of 2.7 percent. In other words, the average annual growth rate of federal revenues is expected to be about twice that of the expenditure growth rate.
This performance is outside the range of recent federal fiscal history as data from the Federal Fiscal Reference Tables suggests. For the period 1990/91 to 2011/12, the average annual growth rate of total nominal federal revenues was 3.6 percent while total nominal expenditures grew at 3.0 percent. When the period 1990/91 to 1995/96 is examined, federal revenues grew at an average annual rate of 3.3 percent and expenditures at 2.7 percent. For the more prosperous fiscal years ranging from 1995/96 to 2008/09, revenues grew at an average annual rate of 4.3 percent and expenditures at 2.7 percent. Yet, for the period 2012/13 to 2015/16, the 2013 Federal Budget forecasts average annual revenue growth of 4.7 percent and expenditure growth of 2 percent.
Indeed, the Finance Minister is asking us to believe that after 2012/13, we are about to score a fiscal hat trick – three consecutive years where the growth rate of revenues will be at least twice that of expenditures – 2013/14, 2014/15 and 2015/16 – with annual revenue growth projected at 3.8, 5.9 and 5.5 percent respectively and expenditure growth at 0.9, 1.3 and 2.8 percent. Since 1990/91, there has only been one period where federal revenue grew at least double the rate of expenditures for three or more years – the prolonged period from 1995/96 to 1999/00 – a period coinciding with rapid economy recovery, expenditure restraint and an export boom. Is such a boom anticipated over the next three years? Not really. The recovery is still anticipated to be slow. Will closing tax loopholes really generate that much extra revenue? This all looks like pretty optimistic thinking to me.