Since 2010, the fiscal “Holy Grail” of the Conservative government has been the elimination of the deficit by 2015-16. Unfortunately, former Finance Minister Jim Flaherty gave his life to that goal. He understood and accepted the factors underlying the emergence of the largest deficit in Canadian history, but he disliked debt and he was absolutely committed to eliminating the deficit.

If he had lived, he would in all likelihood have seen the deficit eliminated in 2014-15, one year earlier than the government’s commitment.  Of course, the forecast Mr. Flaherty included in his last budget showed a deficit of only $2.9 billion for 2014-15, clearly a balanced budget by any statistical calculation, especially when it included the $3 billion contingency reserve. But Mr. Flaherty, ever the prudent fiscal conservative, was not prepared to declare fiscal “victory”, and for good reason.

At the time of the February 2014 Budget, Mr. Flaherty did not have a very good idea of what the final deficit outcome for 2013-14 would be. Based on the latest monthly data from the Fiscal Monitor, we now know that the deficit for the period April 2013 to February 2014 was $5.3 billion lower than that reported in the same period last year, which clearly indicates that the final outcome for the year as a whole will be significantly better than what he was forecasting in the February 2014 Budget.  

Still to come are the fiscal results for March 2014 and the end-of-year accounting adjustments.  Last year, the deficit in these two periods amounted to $8.3 billion.  However, a much smaller deficit for these periods is expected this year.  First, the results to date do not include the full impact of the restraint measures of $1.7 billion proposed in the February 2014 Budget for 2013-14.  Second, a liability of $2.1 billion was booked in the 2012-13 end-of-year period for AECL environmental liabilities.  In contrast, the fiscal results to date for 2013-14 already includes a “one-time” $2.8 billion for federal liabilities related to the Alberta floods.  Third, all of the fiscal improvement in 2013-14 has come in the months of December 2013, and January and February 2014, primarily from much stronger than expected revenue growth, which should to continue over the balance of the year.  Finally, it appears that, once again, the level of direct program expenses has been over estimated.  These factors suggest that the deficit in March 2014 and the 2013-14 end-of-year accounting period should be considerably lower than in the same period last year. 

On this basis we believe that the deficit for 2013-14 could easily come close to $10 billion, significantly below the February 2014 Budget forecast of $16.6 billion.  The Parliamentary Budget Officer (PBO), in his latest Economic and Fiscal Outlook released only this week, forecast a deficit of $11.6 billion for the fiscal year 2013-14.

As much of the better-than-expected outcome for 2013-14 would be expected to carry forward into 2014-15, we also believe, based on our analysis of the fiscal data (see that the federal budget will be in a surplus position in 2014-15. Finance Minister Joe Oliver would then be able to declare ‘fiscal victory’ in his first Economic and Fiscal Update this fall.  This announcement would set the scene for the 2015 budget and the formal “kick-off “ of the election debate on how best to use the projected budget surpluses.

Given the importance of this “fiscal victory” to the Conservative election platform, the government might decide to “upgrade” the status of the fall Economic and Fiscal Update. In the past, Mr. Flaherty would usually present his Update before some local business or community organization in any city other than Ottawa. There was little warning, little media, and little information. This was a complete contrast to Mr. Martin, when he was Minister of Finance. He preferred presentations to the House of Commons Finance Committee with full TV coverage and lots of questions and media.

Since the elimination of the deficit has been the Harper government’s most important policy and political goal, it may want the fall Update to be a major media event since deficit elimination and fiscal management will be two key themes in the government’s election platform. It is also possible that the 2014 fall Update could be used to deliver a pre-election policy statement by Mr. Oliver, rather than the usual fall update.  Since coming to power in 2006, the Harper government has used economic and fiscal updates to introduce numerous policy initiatives.  For example, the October 2007 Economic Statement proposed broad-based tax cuts, including reductions in the general corporate tax, a cut in the GST rate from 6% to 5%, a reduction in the lowest personal income tax rate from 15.5% to 15%, among others.

Eliminating the deficit earlier than forecast provides the government with a strong media message, more flexibility in terms of possible election announcements, and an opportunity to control the fiscal debate not to mention election timing.




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