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McMartin's Budget Preview
Prediction: Canadians will continue to pay more for less in 2007.
SOURCE: Government of Canada, Fiscal Reference Tables, September 2006, p.10.
When federal Finance Minister Jim Flaherty introduces the Conservative government's 2007-08 budget in the House of Commons later today, most observers can be expected to sift through his presentation for signs of an impending general election.
These short-term political considerations, not surprisingly, are certain to continue to overshadow two long-term fiscal trends.
The first, which may be seen in the above chart, is that portion of the yellow area (which represents the federal government's budgetary revenues as a share of Canada's GDP) lying above the solid black line (Ottawa's program expenses, also as a proportion of GDP).
This area above the solid line is the federal government's operating surplus. Put another way, it is the amount of money sent every year by taxpayers to Ottawa in excess of the programs and services the government provides to Canadians.
As the chart clearly illustrates, the federal government has recorded operating surpluses each year since 1987-88. That is, Canadians have been paying more (in taxes) than they have been receiving (in services) for 20 consecutive years.
The second trend evident in the chart is the marked decline in government expenditures as a proportion of the national economy. While Ottawa's revenues have remained relatively static over the past two decades at 16 per cent or so of GDP, program spending has dropped from nearly 19 per cent in the early 1980s, to 12-13 per cent in recent years.
So, even as Ottawa's revenues have stayed relatively constant, program spending today is barely two-thirds of what it was two decades ago.
Both trends are near certain to continue in Flaherty's upcoming budget, and both are likely to be ignored as the public and news media focus on short-term election speculation.
But it is interesting to contemplate how much longer Canadians will be content to, first, overpay for the level of government services they receive, and second, to watch as the federal government shrinks ever-smaller.
How did we get here?
Canada's federal finances were relatively stable from the 1960s through to the early 1970s. Each year, budgetary revenues and program expenses usually were nearly identical at about 15-16 per cent of GDP.
A typical fiscal year would end with a small operating surplus, although when interest charges on the federal debt were added into the equation, these surpluses often finished as small budgetary deficits.
Still, because Canada's economy was growing at a healthy rate, the federal government's accumulated deficit (which may be thought of as "the debt") fell almost in half as a proportion of GDP -- from 36 per cent from 1961-62, to just 18.4 per cent in 1974-75.
Soaring inflation leads to rising debt costs
The 1970s, as many readers will recall, was a period of soaring inflation, coincident with the two OPEC "oil shocks" of 1974 and 1979.
Interestingly, it was the revenue side of Ottawa's finances that first showed above-average growth. Government income rose to 17-19 per cent of GDP in the first part of the decade, before slipping backward as Canada's economic growth slowed in the latter part of the '70s.
By then, however, Ottawa's expenditures also had begun to climb above their historic average, and hit 20 per cent of GDP in 1975-76. That same year, the federal government's string of 11 consecutive operating surpluses came to an end, replaced with a succession of operating deficits that persisted through a dozen years.
Interest rates skyrocket
At about the same time, interest rates began to skyrocket ever higher. In other words, just as Ottawa each year was adding billions of dollars to the country's accumulated deficit, the cost of borrowing grew prohibitively expensive.
These mounting interest charges ensured that the federal government's fiscal deficits were growing larger and larger, year by year. In 1974-75, the budgetary deficit (the operating deficit plus interest costs) was just 1.4 per cent of GDP, but by the next year it had more than doubled to 3.6 per cent. Three years later, it was 5.3 per cent of GDP, and then in 1982-83 hit a worrisome 7.6 per cent.
Not surprisingly, these yearly shortfalls added billions of dollars to Canada's accumulated deficit. As mentioned earlier, the country's debt as a share of GDP fell in half between 1961-62 and 1974-75. But by 1982-83, the debt was back to 36 per cent of GDP -- and continued to soar ever higher in successive years.
Mulroney's Tories take tepid action
The 1984 federal general election saw Brian Mulroney's Progressive Conservatives win a massive majority government, and a mandate to bring the country's mounting deficits under control.
But Mulroney favoured gradual fiscal change rather than major surgery. The Tories introduced a succession of minor tax increases, which pushed budgetary revenues up from about 16 per cent of GDP to the 17-18 per cent range, and oversaw a plethora of half-hearted spending cuts -- which nonetheless prompted apoplectic fits from the usual suspects -- to reduce program expenses slightly from more than 18 per cent of GDP to about 16 per cent.
After nearly four years in power, in 1987-88, the Mulroney government finally recorded an operating surplus, but public debt charges -- which totalled $25 billion in 1984-85, and rose to $40 billion in 1993-94 -- ensured that the country continued to rack-up sizeable budgetary deficits.
From about 40 per cent of GDP in 1984 when Mulroney won election to government, the accumulated deficit grew to a frightening 67 per cent of GDP in 1993 as nine years of Tory rule came to an end.
The Chrétien-Martin Liberals slash spending
Jean Chrétien led the Liberal party to power in 1993, and quickly named Paul Martin as his minister of finance. It was not at first evident that the Chrétien-Martin duo shared a dedication to deficit elimination, but such quickly proved to be the case.
Martin's 1995 budget marked a dramatic turning point in Canada's finances. As mentioned above, Mulroney's Tories had reduced program spending from about 18 per cent to 16 per cent of GDP, but Martin cut that to under 15 per cent in 1995-96, and then continued slashing until expenditures fell to just 12.1 per cent in 1999-2000 and 2000-01.
For the past eight years, with the exception of a slight pre-election lift in 2004-05, Ottawa's program expenses have remained in the range of 12-13 per cent of GDP.
Government revenues, on the other hand, have stayed at about 16-18 per cent. Consequently, for more than a decade, operating surpluses have averaged $47 billion annually.
Of course, these operating results do not include public debt charges, which, fortunately, due to historic-low interest rates and an ever-declining accumulated deficit (down to 35 per cent of GDP in 2005-06), have been falling year-over-year for the past decade.
From a record $49.4 billion in 1995-96, annual interest charges dipped to a mere $33.8 billion in 2005-06.
And so, since 1997-98, Ottawa has recorded 10 consecutive budgetary surpluses, ranging in size from $1.5 billion (in 2004-05), to $19.9 billion (in 2000-01).
What now?
We now have clear evidence of two long-term trends in Canada's federal finances. First, Canadians send a constant stream of tax dollars to Ottawa (16 per cent of GDP), but receive back a much-lower level of government services (about 12 per cent of GDP). And, second, the latter figure means that the size of the federal government now is the smallest in at least a half-century.
How much longer will either trend continue before becoming a topic of public discourse?
It would not be unreasonable for the first to persist for many years into the future, simply because a sizeable number of Canadians support the notion that some surplus monies ought to be allocated to reducing the country's accumulated deficit. (After peaking at nearly $563 billion in 1996-97, the debt now stands at about $481 billion.)
The second trend seems more likely to lead to a political battle in the near-term, given that the "size of government" is an issue that lends itself to ideological debate between the political right and left.
This seems especially true in British Columbia, because Ottawa and Victoria both have centre-right governments with significant budgetary surpluses, and a clear preference for returning surplus monies to taxpayers through tax cuts, as opposed to initiating new or greatly expanded public sector programs. B.C.'s 2007-08 budget, for example, featured a 10 per cent personal income tax cut and kept program spending increases to a modest level.
Of course, opposition is needed for a political firefight over the size and role of government, and it does not seem that either the federal Conservatives or the BC Liberals at the present time face significant opposition to their fiscal policies. At least, it is not evident that any political party is arguing for larger, more interventionist, and costlier government.
And so perhaps both trends may be expected to continue in the foreseeable future, as Canadians (and British Columbians) pay more for fewer services, with government operations growing ever smaller.
Related Tyee stories:
- Harper's Billions: B.C.'s stake in the equalization game
- Thank You Ottawa! The entire BC budget surplus, and more, is due to federal transfers
- John Baird Light Rail Killer: Did Tories' new enviro minister undercut a big light rail project to settle a political score?
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22
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murdock
5 years ago
Get used to it ~ or tell Ottawa to go away
Canadian sheeple had better get used to the 'services' they pay for to be of sub-sub-standards and dropping fast as the demands on Ottawa's piggy trough get really intense.
The real fun is going to start when the current 'western-based' CONformers run out of incomes and have to turn on Oilberta and a re-run of the NEP, cleverly disguised as some re-working of the tax distribution plan...
Chris H
5 years ago
Conservatives no friend to budgets
It is largely thanks to Conservative governments that we have overspending. Remember when Kim Campbell didn't even know what the runaway deficit would be that she inherited from Mulroney? Look at what Bush is doing to the US debt. Would we see the same from a Conservative majority government in Canada? Big tax cuts to the rich and big spending on the military?
Those of us with debt know quite well that our spending is limited because of our debt servicing. That is why any financial planner worth his/her salt will recommend you pay off your debt as soon as possible. For the long-term success of Canada, we need to continue Paul Martin's formula for paying it down while maintaining services to those that need it.
I would be very interested in seeing how a Liberal minority government with the NDP holding the balance of power would operate. It is abundantly clear that the Conservatives have no real allies in parliament.
Elliot
5 years ago
pump it up will! pump it up
pump it up will! pump it up tyee!
NoLeftNutter
5 years ago
Bad math
McMartin’s become a one-trick pony, using the GDP as a benchmark for rationalizing his support of increased spending, providing very little honest information to prove his point. That the Federal government’s rate of spending was about 15% during the 60’s is irrelevant.
It’s his math that is most suspect. He only discusses differences in federal expenditures over the past 40 years. Including Provincial and Municipal expenditures 2006 statistics show that total government spending is almost 40% of GDP!!
Lastly, if the gap between income and expenditures were actually 3-4% that would mean a surplus of $40-55 Billion. Where’s the money Will? My guess, in advance of today’s budget, is that total expenditures will be about 15.5% of GDP
If the Tyee expects to have a credible voice on this and any budget issue it should seriously consider an alternative reporter.
bloodnok
5 years ago
Worse Math
Right on, NLN! That stupid GDP. What good is that as a benchmark? Let's use average individual income! Before taxes! Adjusted to actual dollars!Or perhaps the cost of televisions. No? How about the GNP? It's grosser and national to boot. Anything but the GDP. Did you notice that with the change of only one letter GDP becomes NDP? That McMartin, he's always trying to influence us readers with his lefty politics. Not you and me though, right NLN? We're on to those sneaky tactics.
I do have to take exception to your statement that total government expenditure is 40% of GDP (that acronym again!). Using your own evidence, I would venture to say that actual expenditure is closer to 109%! I know it is in my home.
And why only the last 40 years? That's very suspicious to me. Why not the last 140 years. huh? That would really put things in perspective.
And a surplus of 50 Billion dollars! Ridiculous. You called that one right, NLN. Where is that money? Certainly not in some slush fund accessible only to those in the hallowed halls of power and their benefactors. No way! If that money really existed we'd be able to see it clearly. Nobody should be dumb enough to report on stuff like that unless they have all their facts straight right at the beginning.
In this struggle against bad math and misinformation, I am with you NLN, every step of the way.
Frank
5 years ago
NLN
Um, did you read the whole article?
Much of the surpluses go to paying interest on our debt. Will explained all of this in the article. It can be confusing unless you follow what an "operating surplus" is.
Frank
5 years ago
murdock
And you'd prefer what murdock, that we break up into either 10 or 30 million separate countries and renege on the debt?
NoLeftNutter
5 years ago
Frank
Fair points. To argue that program spending should be directly relative to GDP is flawed, but if you want to discuss that, this year’s budget is roughly 14.5% of forecast GDP for program spending. Significantly higher than Will claims.
Overspending got us into a debt situation so why not calculate debt service as part of expenditures?
G West
5 years ago
NO left nutter
You're criticizing McMartin's math!
That is funny. You're the guy who doesn’t realize that GAAP call for allocating capital expenditures as assets.
Spare me.
As you were Will, there's absolutely nothing wrong with your figures, your analysis or your math.
I imagine a lot of conservatives are pretty hot under the collar today with Flaherty's Liberal budget though. Talk about something for everyone; except of course those who were salivating for a further insane break on capital gains.
Will
5 years ago
No Left Nutter
I've read and re-read my article to find any indication that I advocate "increased spending" by the federal government. Would you be so kind as to point out where that comment appears?
This article merely tried to point out that one might have expected right-wingers to be upset about massive annual operating surpluses (which suggest that Canadians are sending far more cash to Ottawa than they have to) and left-wingers to be concerned about decades-low federal expenditures. To my mind, it's free (or nearly so) of editorial comment, but simply observes fiscal trends over the past several decades.
As for my math being wrong, I confess to having made very few calculations, because most were already done in the Fiscal Reference Tables (published by the Department of Finance) cited in the chart.
Y'know, NLN, you too could read those finance documents, and others, and then offer informed comment here at The Tyee, instead of the misinformed, erroneous and deluded remarks you have posted to date.
Give it a try!
Will
PS. For example, you could read Flaherty's budget documents and learn that program spending in the coming year is expected to be 13.3% of GDP, and not the various numbers you seemed to have pulled out of thin air.
NoLeftNutter
5 years ago
Numbers
As for you Garffy, here's your quote from 5 days ago about the provincail budget -
So what was the provincail government expendtiure this budget, $34B as you claim here or $29B as you've climaed in a previous post?
Will, I’d like to see you math. This link
http://www40.statcan.ca/l01/cst01/econ15.htm
shows the GDP at about $1.4T versus about $200B in expenditures, 14.2% as I figure it. As for the question about using your pulpit to support more spending by using the GDP comparisons, it’s what you do Will, it’s what you do…….
Frank
5 years ago
NLN
What's with the GDP thing, of course absolute spending should rise with the GDP. A big reason the GDP rises is more people in the country.
NoLeftNutter
5 years ago
Frank
GDP may be part of a rational analysis of spending trends. My impression of Will’s editorials is that he uses the GDP as his primary reference so that he can rationalize his pre-established position for more spending.
To reference your earlier comments about his article, I confess that I was so quick to condemn his position that I skimmed over the mention of debt service that you pointed out…mea culpa.
Lastly, I don’t concur that absolute spending should continue to rise. Even factoring in population increases and economic growth I don’t see how doubling Federal program spending in the last decade has provided meaningful benefits for Canadians. I do know that it means more tax dollars are coming out of our pockets then would need to if spending was contained.
Frank
5 years ago
No problem
No problem.
As for the use of the GDP as the primary comparison I don't have a problem with it. I see your position, that why should spending increase in lockstep just because the population becomes richer? Fair enough, but since that figure also reflects population growth and because ideologically I think a wealthier country should be able to afford better services I'm okay with it.
Will however is pointing out we're not getting what we think we're getting from a superficial look at the numbers.
G West
5 years ago
NLN
In addition to your lack of any analytical ability, if you go back to the original budget thread, you'll find I pointed out your error twice there.
After the third time, what's the point - you're completely dishonest and unreliable anyway. You promised to leave if you couldn't sustain your point that Taylor's budget was the do it ourselves budget - that evidence was clearly presented on the government's website and confirmed by about 10 independent columnists - and you're still here. Why?
I don't know why Will McMartin bothered with you; you're clearly just a waste of space and energy.
Do you even know what GAAP stands for?
NoLeftNutter
5 years ago
Frank
What frightens me about the trend is that the GDP has grown about 24% ($1.1T to $1.375T) since 2001 while program spending has increased about 58% ($126B to $199B). All the while the standard of living for the average Canadian is stagnant…..
I definitely agree that we’re not getting what we pay for but for different reasons than Will does.
NoLeftNutter
5 years ago
GW
I missed your blathering when I posted my response to Frank’s comments. Seems like you’re the one that struggles with rational discussion on this site. As much as Frank likely appreciates you fighting his battles for him, aren’t you taking your big sister hall-monitor shtick just a little too far?
NoLeftNutter
5 years ago
GAAP
As for what GAAP is –
Garfy Again Assumes the Pose
Garfy’s an Abominable Antagonistic Poster
Garfy Assumes Anal Pretense
Garf’s Act Ages Poorly
Goofy Analysis Again Provided
Garfy Actually Appears Pathetic
Garfy’s Angst Again Prevails
Garfy’s Achievement Absolutely Pales
Garfy Admits Abhorrent Portrayal
Garfy Affirms Anguished Performance
Garfy Accepts Additional Pounding
Garfy’s an Articulating Acting Phoney
Is that GAAP enough for ya?
G West
5 years ago
Like I thought
You are exactly what you appear to be: A mistake just looking for the next place to happen.
It's impossible to have a rational discussion with someone who:
a) won't admit when he's wrong;
b) knows nothing about accounting;
c) can't read;
d) is hopelessly rude and committed to ad hominem insults whenever confronted with his mistakes and ignorance.
Your behavior here, your ignorant and uniformed remarks about a piece of journalism you didn't even trouble to read accurately confirmed it beyond all doubt.
And, furthermore, you’re someone who doesn't know what Generally Accepted Accounting Principles are.
Not to mention the typical bullyboy tactic of resorting to back alley diction when you are challenged.
Frank doesn't need me fighting for him and dealing with you is a pleasure: Somewhat similar to sweeping dead leaves off my walk.
NoLeftNutter
5 years ago
GW
Back in your small man with much to be small about disguise I see.......
The brain
5 years ago
Scares me too, Frank... scares me too...
I couldn't say it any plainer myself. If our GDP falls due to a recession, what happens to spending? Well, we run a deficit first before cuts come and by my calculations, we will begin to run a deficit within the next year due to the GST point being shaved off, combined with corporate tax cuts. Unfortunately, the numbers won't show up til 2009. I would say next year is when the hangover sets in with a commodity drop and the year after that, the bills really start to come in with the increases in military spending, Quebec givaways, Republican spending like this by the Cons just can't last forever without red ink and we'll get it, regardless of who's in power. And that will bring all eyes on our currency and debt load.
There is always too much talk about GDP being relative to debt... but if we don't tax GDP like we should in high times, the choice simply isn't there to raise revenues in bad times and revenue falls. I don't like what the numbers are saying and I certainly don't like what they will do if commodities bottom.
Frank
5 years ago
Not me brain
Hey Lorne, that was NoLeftNutter you're quoting, not me.
I would say like to put forward the view that as a group we've made Will's article look right on the money. That whether you're on the Left or the Right people should have issues with what's been going on with federal budgets.