Commentary

March 30, 2012 | APPEARED IN THE FINANCIAL POST

The Conservatives' no-cut budget

EST. READ TIME 4 MIN.

There it was on the front page of The Globe and Mail: $5.2-billion [in] total spending cuts. The Toronto Star screamed: Tories slash spending in fiscal overhaul, while CTV proclaimed: Budget to cut spending nearly $6-billion.

Perhaps they read a different budget than the one we found on the Department of Finance's website. Here's what the Conservatives' budget actually stated: The results of the government's review of departmental spending amount to roughly $5.2-billion in ongoing savings.

That's savings, folks, not cuts.

And what will the Conservatives do with the savings? Spend them.

In the coming fiscal year (2012-13), the Conservative government plans to spend $245-billion (leaving aside interest charges on the debt). From there, program spending will increase each and every year over the budget's five-year planning horizon. By 2016-17, program spending will be some $27-billion higher than it this year.

How exactly is a $27-billion increase in spending interpreted as a $5.2-billion cut?

It's simple, really. When the Conservatives slow the growth of spending increases, media and other pundits interpret that as cutting. When they find savings in one area of their $245-billion budget and spend it in another area, they're cutting. When they reduce planned spending some four years into the future (2015-16) from $266-billion to $262-billion, they're cutting - even though planned spending is still increasing from 2014-15 to 2015-16.

Whether the Conservatives decrease, increase or keep spending constant, they are seen to be slashing it.

The $5.2-billion in savings comes from departmental spending which only accounts for approximately 31% of the total amount that the federal government spends on programs each year.

And even departmental spending will not be cut by the headline figure of $5.2billion. Rather, the $5.2-billion in savings won't be achieved until 2015-16 and it will decrease planned spending rather than actual year-over-year spending. As the graph close by shows, departmental spending will increase by $2.4-billion over the next five years. There will be even greater increases in overall federal spending on transfers to people and governments.

The unfortunate reality is that Canadians are not getting an open and honest discussion about our government's fiscal situation, potential risks and what really needs to be done.

Consider that The Globe and Mail's editorial board thought it was A prudent, conservative budget and the National Post's editorial board thought it was Putting Canada on the right fiscal track.

But that fiscal track is one that relies on the hope that revenues will eventually catch up to spending to balance the books by 2015-16. Over the next four years, the government is assuming revenue growth averaging 4.9% annually.

Even as the Canadian economy was humming along from 2002 to 2007, and outperforming most other countries, federal budgets never forecast revenue growth of that magnitude. For instance, Budget 2003 forecast average revenue growth of 4.0%; Budget 2004, 3.3%; Budget 2005, 4.2%; Budget 2006, 3.6%; and Budget 2007, 3.5%.

A plan that relies on overly optimistic, perhaps even unrealistic, revenue projections to grow out of deficit contains significant downside risk and almost no upside potential. If revenues don't increase as expected, the country will be left with larger deficits for a much longer time period and significantly more government debt.

One slight bump in the road ahead and there's almost no chance that the government will be able to meet its 2015-16 balanced budget target, which is already one year later then promised in last year's election. Even the government's own estimates show that if economic growth stalled by a percentage point, the deficit would grow by about $4-billion.

Instead of relying on a risky plan to balance the budget, the Conservatives should have used their majority to enact a bold and aggressive plan to balance the budget more quickly through actual reductions in spending. Doing so would have reduced the tremendous debt burden being passed to the next generation of taxpayers and helped set the foundation for future economic growth.

A shorter timeline to a balanced budget would have also mitigated the risks associated with future economic shocks, leaving the Conservatives with significant upside potential. That is, if revenues rebound robustly, the government would have the fiscal room to implement a much-needed multiyear plan to reduce personal income taxes.

While most in the media may think the government delivered a conservative austerity budget, the reality is otherwise. The 2012 balanced budget plan was almost identical to that delivered under a minority Conservative government back in 2011.

We noted then that Flaherty's plan was on shaky ground. We'll stick by that assessment now.

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