Finance Minister Francois-Philippe Champagne announced on Tuesday that last year's projected deficit of $78.3 billion had fallen to $66.9 billion, a decrease of $11.4 billion. While this may appear as sound fiscal management, critics argue it is a classic political maneuver used by finance ministers for decades, particularly perfected by the Jean Chretien Liberal government from 1993 to 2003.
The Old Trick of Underestimating Revenues
The strategy involves deliberately underestimating government revenues and overestimating expenditures at the start of the fiscal year. When actual numbers come in better than predicted, the government can boast about its fiscal prudence. During the Chretien era, the average annual budget balance came in $10.7 billion better than initially predicted, year after year.
Prime Minister Mark Carney and his finance minister now appear as geniuses for reducing the deficit by $11.4 billion. However, this could also indicate poor budgeting skills. The government's assumption that the average oil price will be US$73 a barrel this year, while it currently hovers around US$100, further suggests a conservative estimate that will likely lead to higher tax revenues.
Misclassification of Expenses Raises Red Flags
The parliamentary budget officer (PBO) has pointed out that the government misclassified $94 billion worth of operating expenses in its November budget as revenue-generating capital investments, contrary to standard accounting practices. If properly reclassified, the PBO warns that Prime Minister Carney will fail to achieve his promise to balance the government's operating budget by 2028-29.
Furthermore, the spring economic statement lacks any path to balancing the capital budget. The federal government is projected to pay $58.7 billion of taxpayers' money this year alone servicing Canada's $1.4 trillion public debt. This amount exceeds the $57.4 billion that the federal government will transfer to the provinces for health care this year.
Historical Context and Future Outlook
To be fair, conservatively estimating government revenue while overestimating expenses can be a sensible fiscal policy, helping to manage unexpected economic shocks such as war. During the Chretien government, Finance Minister Paul Martin used economic prudence to steer the country from huge deficits into surpluses. However, that was achieved mainly by cutting federal transfers to the provinces, which downloaded costs to municipalities, leading to a loss of public services and labour strife.
As Don Drummond, Alexandre Laurin, and William Robson wrote in a paper by the C.D. Howe Institute: "Canada can no longer pride itself on its fiscal discipline … Restoring it will take a real change in direction. Governments must rein in spending, set a credible path to balance, and pursue reforms that boost investment and productivity, including shifting the tax mix away from income towards less distortionary taxes."
The same deficit reduction trick will likely occur again this fiscal year, as the government's conservative oil price assumption will probably lead to higher revenues. But without genuine fiscal reform, Canada's debt burden will continue to grow.
