The 2014 Federal Budget

With so much commentary out there on the 2014 Federal Budget, there is probably not much left to contribute but here are a couple of thoughts. 

First, I don’t agree that this is a minimalist or do-nothing budget or boring budget.  This budget essentially balances the books and sets the groundwork for major tax or expenditure initiatives in advance of the 2015 election.  That is doing something.  It also cements the government's vision of a much smaller federal government though what such a small government plans to do with the forecasted surpluses is something that has not received much attention.

Second, as Figure 1 shows, the budget balance act is a function of two things – continued anticipated revenue growth and a slight decline in total budgetary expenditure from 2013/14 to 2014/15.  Despite the spending announcements made - most of which are spread years far into the future - spending is actually planned to decline from 280.5 to 279.2 billion dollars in 2014/15 before resuming an upward trajectory in 2015/16 – below but parallel to revenues.  Much of the announced spending is spread out years into the future.  According to the figures in the budget, over the period 2013-2018, the average annual growth rate for revenues works out to 4.6 percent while expenditures are expected to grow at an average of 2.6 percent. The relatively strong revenue growth is what I find the most intriguing - at about this time last year, I would not have thought revenues could continue growing as much as they have or indeed are forecast to.

 

The longer term implications of all this are presented with historical context in Figure 2.  Barring any unanticipated economic shocks, both the revenue to GDP and the expenditure to GDP ratios for the Federal government will fall below 15 percent – the lowest they have ever been since 1966.  By 2018/19, the revenue to GDP ratio is anticipated to reach 14.4 percent and the expenditure to GDP ratio will hit 14 percent.  This sets the stage for potentially large surpluses – as much as 10.3 billion by 2018/19.  Assuming this all comes to pass, what will the vision be for a much smaller federal government with large projected surpluses?

 

 

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Comments

[Questioning Canadian]

Speaking of budgets and deficits:

1. Were there any academic economists in Canada who opposed stimulus spending in the fall of 2009? Any here at WCI? I can't think of a single pundit in the media who was. Would it be fair to say 95%+ of economists in Canadian academia supported stimulus? 100%?

2. Was the stimulus spending effective? Coyne is writing today that research shows the stimulus spending had little or no effect.

3. Did Canada add $160 billion to its debt based on the advice of economists to little or no effect?

[Bob Smith]

I don't know that Canada spend $160 billion with little or no effect, we did get gazebos in Owen Sound and community centers in Whitby. And while partisan lolly may be of little value, a good chunk of the stimulus funds ended up being spend on infrastructure that did badly need upgrades/repairs/improvements. On that account it may have been justified even if it had no real impact on growth (and, as others on this site pointed out at the time, it makes sense to spend money on infrastructure during a recession, since contractors are going to be more competitive if private contracts are few and far between). Did it stave off a worse recession? Certainly a number of federal interventions probably did (I'm thinking of their intervention to provide liquidity to the mortgage market - though I think the government ended-up making money on that program. Had the real estate market in Toronto and/or Vancouver crashed, the last few years would have been very different). I think the observation made by some commentators that without knowing the counter-factual it's hard to say is a fair one. Ccertainly I don't think the fraser institute (who I think wrote the report that Coyne referred to) is in a position to give the definitive word on the subject (that's not an attack on them, I've done work for them, and some of their work is good, but assessing the impact of stimulus is a difficult exercise).

I'm also not sure that it's fair to say that 95% of economists in Canadian academia supported stimulus - you can check back through the records, but I'm sure there were a number of contrary views expressed on this site .

[Bob Smith]

Livio: "According to the figures in the budget, over the period 2013-2018, the average annual growth rate for revenues works out to 4.6 percent while expenditures are expected to grow at an average of 2.6 percent."

The revenue growth is less surprising when you look beyond the headlines of Conservative tax policy over the past decade. The public face of the Tories has been tax cuts (GST, corporate income tax) and tax goodies for families (various boutique tax credits). But look behind the public façade and the gimmicks and they have been very aggressive in broadening the tax base and closing down what they see as being inappropriate tax avoidance/loopholes, etc. The big one, of course, was income trusts, but we've also seen them tightening Canada's thin-capitalization rules to protect the Canadian corporate tax base (we've seen expansions of those rules in the last three budgets), in the last budget we saw them kill a popular character conversion structure that allowed taxpayers to turn income into Capital gains. In this budget we see them crack down on the use of captive insurance companies that potentially allowed Canadian companies to park cash offshore. And now they're talking about introducing anti treaty-shopping rules (which raise a whole host of legal issues, but which isn't prima facie objectionable from a policy perspective. None of those show up on the radar screen of Joe Q Voter (I don't believe I've ever debated the merits of treaty-shopping at Tim Hortons, but they add up (and as an aside, I think Finance underestimates the impact of some of those changes - I just don't know whether its because they're boobs or because they're intentionally trying to understate their tax increases).

Behind the policy stupidity of some their high profile tax moves (boutique tax credits, HST cut), they've actually pursued a remarkable sensible tax policy of base broadening. To be sure, this is no doubt driven by the mandarins at Finance rather that Tory policy wanks, but hey the government lets them do it, and if they wear the blame when the mandarins screw up, they get to claim the credit when they do well.

[Livio Di Matteo]

QC: WCI economists and their position on stimulus in 2009? Good question. I wasn't blogging yet on WCI but in 2009 I would have supported some short term deficit financing given the severity of the downturn. However, given that the federal government continually trumpeted the fact that Canada weathered the recession so well and outperformed other G-7 countries, it could have moved more quickly to balance the budget.
Bob: Good point on the base broadening.

[The Keystone Garter]

I find it annoying Harper and Flaherty always brand public spending as bad for jobs and private tax cuts as good for jobs. AB will be a have not province if they don't diversify their revenue base away from oil. Electric cars are always getting cheaper. There will be grid power sources used first by nations that have their monsoons or Himalayan melt affected, followed by EU and North America...every tax cut at present dooms AB/SK.
A community college I wish to attend is using computer programming metrics based upon the 2006 Census. If anything, Haprer should've altered the Census to make it more biz-friendly. When you believe a dead person managed to tunnel through a rock door, when you believe basic chemistry like the one-way behaviour of GHGs doesn't apply, you are a bad human being and should not have any significant influence on the future course of the human species.

[Jim Sentance]

Seems to me that there is a bit of a difference between stimulus spending and debt accumulation. If the government passively sits back in a recession and allows the budget to go into deficit I'd hardly call that stimulus. And it's certainly not what I would have meant in 2009 as stimulus spending.

So lets start perhaps by deciding how much of that 160 billion was stimulus and what part simply cyclical deficit.

[Rick B]

I wouldn't pat the Conservatives on the back for balancing the budget, it's not like it was "Yeoman's work". They glided in on a wave of rising oil prices, an easing of foreign investment rules and direct subsidy in the energy sector, and by forcing an expansion of household balance sheets. The recession came and they pounded their chests on an economic action plan and then quietly passed the responsibility of economic recovery onto provinces by forcing expansions of their balance sheets while they cut expenditures at the Federal level(provincial deficits are rising as the federal deficit is falling... so much for a central fiscal authority doing what it takes). So I agree with you Nick that the budget isn't boring, but the excitement comes from watching the discussion stray away from how easy it is to balance a budget when you don't care about the welfare of your constituency or the outlook for the economy to the politics of whether the budget is really balanced this year or not.... The politics is turning my stomach.

So great: High unemployment/low work force participation as we struggle out of a recession. Lower taxes that have led to reduced transfers just when people need it most. Growing inequality. Growing household debt. Reduced international competitiveness in manufacturing as a result of a pro energy/pro direct investment "in a low tax environment", but no sign of any promised increase in technical high skill opportunities that were to materialize as we used the high dollar to increase productivity(despite the skills mismatch-supply side rhetoric). But SURPLUS.... YAY!!!!

I'll bet $5 that surplus goes directly into more tax breaks... because Canadians know how to spend their money better than the government!

[Andrew F]

Not all of the $160 billion in accumulated deficit since 2008 was due to stimulus. A lot of it can be attributed to falling revenues and automatic stabilizers like increased EI payments.

[Nick Rowe]

Jim and Andrew F: I think that is a false dichotomy. Just because a deficit is automatic doesn't mean it won't affect AD like a discretionary change. The whole point of automatic stabilisers is that they are a substitute for discretionary changes. Automatic deficits should actually work better, just because they act more quickly, and also people will expect them, so they stabilise expectations.

Here's my old post on that subject.

QC: It is impossible to know, from a sample of one, whether fiscal policy had any effect. We don't know what would have happened otherwise. Even with a larger sample, we cannot be sure whether the fiscal policy was exogenous. Only if you gave me a sample of 100 countries, and let me toss a coin to decide if each country will or will not use fiscal policy, could we be reasonably sure what the effects are. But they won't let me run that experiment.

For what it's worth, I strongly supported not trying to keep the budget balanced during the recession. (People's memories are short, but back in the early days of the recession there was a lot of resistance to the idea that the government should let the budget slip into deficit.) And I think the increased spending, especially preponing investment spending, at low interest rates, was a good thing. Whether that fiscal policy was really needed to help prevent the recession being worse, or whether monetary policy could have done the job alone (and monetary policy could have been better, in hindsight), I do not know, but it seemed like very cheap insurance.

Overall, I find it hard to fault the government's fiscal policy during the recession. Maybe it should have been quicker, but it's hard to do things quickly in the real world. Looking around the world, it compares very well. Other countries did stupid things; ours didn't. Most of good governance is simply avoiding all the opportunities to do something big and obviously stupid. That is high praise. And don't say they tightened too quickly before full recovery; once the Bank of Canada was up off the Zero Lower Bound there was no justification for fiscal policy to increase AD. (Plus, if anybody actually understood the way fiscal policy works in New Keynesian models, which so very few do, that tightening is exactly what is recommended.)

Bob Smith's comments were an eye-opener for me. Funny you don't hear about that big picture stuff that doesn't make the headlines.

[Determinant]

In Government there are the five things you campaign on which are your headline partisan items, there are the five disasters that arrive at the doorstep of whatever government is in power at the time (the Recession) and then there are the housekeeping items which governments deal with at leisure and which usually not very partisan.

Bob's example of tax base broadening is a housekeeping item but every so often it has an outsize effect. Another example is consumer product safety laws, which aren't partisan in any real sense but everybody wants when a dead toddler hits the news because of a poisoning or choking accident. Or graduated drivers licensing laws, which dramatically lowered the young driver crash rate and in Ontario were passed with all-party support.

[Bob Smith]

"Bob's example of tax base broadening is a housekeeping item but every so often it has an outsize effect."

I think that's fair, but in some sense, the housekeeping goes to the real heart of government - if they don't get that right, the rest doesn't really matter. The campaign items and the disasters are just the façade of government, it's the housekeeping that keeps the edifice standing.

And while I attribute the base broadening of the last few years to the mandarins at Finance, I think Conservative political direction has some impact, albeit in a round-about way. Denied, by virtue of Conservative political realities, the ability to raise revenue by increasing tax rates (as they might be able to do under an NDP or Liberal government), Finance has become more aggressive at finding other ways to raise revenue without (superficially) raising taxes. Necessity, as they say, is the mother of invention.

[Senator-Elect]

Surprised that no one is arguing against this austerity budget. With due respect to Professor Rowe, I would hardly say that we are safely off the zero bound. One percent is virtually the same as 0.5%, and it could be argued that the Bank of Canada moved much too soon from that level. Maybe the housing boom had something to do with that? Meanwhile unemployment is still high, job growth sucks and inflation is way under target! If the housing market comes crashing down, what then? Forget the New Keynesian model and look at reality: the economy is pretty weak. And every federal cut is weakening it further.

I am somewhat shocked that there is no debate in Canada about the effect of federal deficit-fighting. We really must be conservative by nature. Too bad the truly conservative thing to do is drive for full employment and eliminate the deficit from the revenue side.