Fiscal Ships

“We're two ships that pass in the night, And we smile when we say it's alright
We're still here, It's just that we're out of sight
Like those ships that pass in the night”  Barry Manilow

Next week is a double-header of sorts for economists interested in Canadian public finance – a Federal budget on Tuesday and the Ontario budget on Thursday.  The Federal government is generally expected to balance its budget notwithstanding all the recent hand-wringing over the “atrocious” economy.  Ontario on the other hand will once again make a faith based fiscal statement that it is on track to balance its budget by 2017.

In preparation for next week, it is instructive to review a couple of simple charts that help illuminate why the Federal government is going to balance its budget and begin generating surpluses while Ontario is not.  Data from Statistics Canada, the Ontario Public Accounts and the Federal Fiscal Reference Tables was used to construct real per capita government expenditures and revenues in 2014 dollars deflated using the GDP deflator (v62788999).  

Figure 1 plots real per capita expenditures (program plus debt service) for the Federal and Ontario governments from 1981 to 2014 along with a linear trend line.  In the early 1980s, per capita Federal government spending for Canada was approximately 50 percent greater than per capita provincial government spending in Ontario.  Since then, real per capita Ontario spending has trended up while Federal spending has trended slightly downwards. In 2014, real per capita Ontario government spending was about 20 percent more than that of the Federal government.  

Between 1981 and 2014, real per capita Ontario government spending rose from $5,297 to $9,521 – an increase of almost 80 percent while Federal government spending fell from $8,176 to $7,892 – a decrease of about 4 percent.  Needless to see, these are not entirely unrelated processes.  As the Federal government dealt with its fiscal crisis in the 1990s and then disengaged from a more active federal role, provinces across the federation have taken on more.  I suppose it can be relatively easy to develop a sustainable fiscal structure if spending demands are transferred down to lower tier governments.  However, as disappointing as this might sound to some, this process began before the Harper government took office and has been underway for some time.

Figure 2 plots real per capita government revenues for the Ontario and Federal governments again from 1981 to 2014.  Here, both governments have exhibited an upward trend in per capita government revenues with Ontario showing a somewhat steeper ascent.  Real per capita provincial government revenues in Ontario grew by 80 percent – actually pretty closely matching its expenditure growth – while during the same period Federal government real per capita revenues grew by just under 20 percent.

So putting it all together in Figure 3 pretty much explains why the Federal government is going to balance its budget but Ontario is not.  The Federal government had a very large fiscal gap with per capita expenditures much greater than per capita revenues but over three decades has closed the gap by growing its revenues while holding the line on expenditures growth.  On a real per capita basis, the Federal government is essentially spending as much now as it was thirty years ago.  It should be noted that balancing the budget for Ottawa required action on both the revenue and expenditure side – growing revenues plus expenditure restraint were both needed to balance the budget.

 

Ontario on the other hand also had a fiscal gap in the 1980s but over the subsequent three decades managed to growth its revenues and expenditures in tandem such that over the long term – as the trend lines indicate - the gap has persisted.  For the Federal government, its fiscal ships set a course that eventually crossed the paths for per capita revenues and expenditures.  Ontario on the other hand has been all right with its fiscal ships sailing parallel to one another and never meeting.  In these types of situations, I suppose its important to keep smiling.

Comments

[SvN]

Livio; I'm just curious to know what deflators you used to calculate "real" spending by both levels of govt.

I ask only because we've heard for decades that the price of health care has been rising much faster than that of the rest of the economy. One result of that is that health care costs have become much larger shares of total provincial spending (and an aging population has only made its impact on provincial budgets even more important.)

So when you compare "real" per capita spending by the two governments, I'm wondering whether this is really real. Does it correct for changes in *relative* prices? If not, do we have any idea how big a difference changes in relative prices have made?

[Livio Di Matteo]

Hi SvN: I just used a standard GDP deflator - series v62788999 - and applied it to both Federal and Ontario spending. I suppose you could take Ontario's spending and divide it into health and non-health and use separate deflators like the ones provided out of the CIHI National Health Expenditures series. For Ontario, the Government Current Expenditure Implicit Price Index (1997=100) goes from 51.1 in 1981 to 154.8 in 2013 (a 203% increase) while the total Health Care Implicit Price Index 49.9 to goes from 148.4 (a 197% increase). The increase in the GDP deflator over the same period is definitely less - about 140 percent. Thus both government spending and health spending have risen at a faster rate but their increases have been similar. However, if this is done for Ontario, the federal numbers should also be deflated using the Government Current Expenditure Implicit Price Index and that goes from 53 in 181 to 155.7 in 2013 - an increase of 194 percent. If I deflate the numbers using the Government Current Expenditure Price Index 1997 dollars for Canada, federal real per capita revenues between 1981 and 2014 go from $5117 to $$4898 while expenditures go from $6309 to $4949. Using the GCEIMPI for Ontario, Ontario real per capita revenues go from $3837 to $5485 while expenditures go from $4232 to $6016. If you plot these numbers as in Figure 3, you get pretty much the same diagram with respect to the trend lines.

[SvN]

Thanks! That's a very interesting answer.

[Best Beta Trading]

The baseball fan from out of town said anyone in my country can learn economics and contribute to the field my testing a hypothesis in one jurisdiction and applying in other if successful (Universal Health Care, maybe daycare, the lack of co-ordinated pharmaceutical purchases is the anti-thesis). But he said macro still has value as it is sometimes the only tool available to a central bankers. He said giving a CBer the ability to control accelerated depreciation rates might be good.

The biggest mystery I'm working on from the Budget is accelerated depreciation. We have increased the rate of it now while our interest rates are low but while the dollar is low against the USD. I wonder if there are not better ways to automatically tweak this rate in relation to employment and debt and exchange rates between mature economies? Funding it when oil was higher would have been a nice counter-cyclical innovation for an exporting nation such as ours.