Boiling the budget down to the number that matters most

Let’s assume the federal budget to be delivered day after tomorrow maintains, as advertised, more or less a holding pattern for 2010-11 on spending and taxes. The real news (after fun surprises) will be in whatever framework it sets for shrinking the deficit over the next few years.

Prime Minister Stephen Harper summed up the challenged yesterday this way: “We know we cannot … spend at this kind of level indefinitely.” Given the $50-billion-plus deficit Ottawa is now running, his point might sound unassailable.

In fact, spending is already projected to track down as a share of the economy over the next three years, back to where it was in 2007-08, before the recession struck. After running at a stimulus-bloated 14.7 per cent of gross domestic product this year, program expenses are slated, in the 2009 budget, to drop back to 13.1 per cent of GDP by 2013-14.

Yet even that shrinkage won’t come close to clearing up the deficit, at least not according to some widely reported independent analysis. The problem is that with only modest economic growth expected, after a period of deep tax cuts, revenues won’t amount to enough to balance the books, even if spending as a share of GDP declines.

So the Prime Minister’s assertion that spending can’t go on at this level shouldn’t be understood to mean that spending is now historically high and we have to go back to normal levels. It’s historically low, and yet, he tells us, must go even lower.

But not all spending. In a recent budget briefing, a senior government official said the rate of growth of transfer payments to provinces for health and education will be maintained, as will payments to the elderly.

That promise to maintain not just the absolute level but the pace of increases is, if true, a remarkable commitment. Benefits to the elderly not only grow with the size of the retired population, they are also fully indexed to inflation. Major transfers to the provinces and other levels of government are projected to average 5.2 per cent growth a year for the next five years. Health transfers now automatically climb six per cent a year and the Canada Social Transfer, which supports education, is guaranteed to grow 3 per cent a year.

If the Tories are serious about holding rates of growth in those areas sacrosanct, then what’s left—so-called direct program expenses—would have to be seriously cut to shrink the overall spending level. That includes defence, Indian and Northern Affairs, student financial assistance, and Crown corporations.

Direct program expenses were running at around 6.2 per cent of GDP before the recession; hard times prompted them to spike up to over 7 per cent. They are forecast to settle back to 6.3 per cent by 2013-14, according to the 2009 budget plan.

So that number, it seems to me, is the first one to look for if the 2010 budget maps out a credible deficit-fighting strategy: how much are the Conservatives planning to reduce the direct spending of the Government of Canada below its present portion of the economy?

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