Federal Surplus: Digging Deeper

This week Stephen Harper’s Conservatives are trumpeting the announcement of a small surplus ($1.9 billion) for fiscal 2014-15.  The political symbolism of this “good news” is a welcome change for them from a string of negative economic reports (most importantly, news that Canada slipped into recession in the first half of 2015) that has damaged their traditional claim to be the best “economic managers” for the country.  Let’s take a deeper look at the surplus, where it came from, and what it means.  [Portions of this commentary appeared in a feature for the Ottawa Citizen prepared by Jason Fekete.]

The original budget for 2014-15 (tabled in March 2014) anticipated a very small deficit of $2.9 billion.  That planned deficit was tiny by any measure: equal to just 1% of federal revenues, and 0.15% of GDP. In effect, it was a “rounding error” in the grand scheme of federal fiscal affairs.  And even then, it was already obvious that the government could – if it wanted too – eliminate the deficit through accounting adjustments (such as decisions regarding the timing of major expenditures, or the booking of particular one-time costs).  Given the political emphasis which the Conservatives placed on eliminating the deficit, this was always a strong possibility.  Remember, the Conservatives originally planned to eliminate the deficit by the 2014-15 fiscal year, in line with their 2011 promises to balance the books before implementing their major tax cut proposals.  Then-Finance Minister Jim Flaherty preferred to be cautious, however, about the precise timetable for returning to balance.

By April of this year (when the government brought down its 2015-16 budget), its deficit estimate had shrunk further to $2 billion – despite the negative impact of lower oil prices on federal finances.  Now the government has booked an equally tiny surplus, on the other side of the ledger.  Whether it was a deficit or a surplus, a budget gap of this magnitude is economically irrelevant.  Only politicians care whether the final balance is a couple of billion dollars above balance, or a couple of billion below.  For economic purposes, the surplus announcement will have no effect.

Indeed, declaring a positive year-end budget “surprise” is a tried-and-true Finance Minister’s trick, one that was originally perfected by Paul Martin.  The idea is to under-promise and over-deliver: it is always better to exceed expectations than fall short of them.  And it is always better to front-end-load bad news, saving the good news for later.  So Finance Ministers now routinely build ample cushion into their various projections (and not just in the explicit “contingency fund” which is included in each federal budget).  Then, at the end of the year, they stand in triumph, claiming their “prudent management” is what delivered the good end result.  The fact that the government passed special regulations authorizing Finance Canada to make this announcement in the middle of an election campaign, reveals their long-standing expectation that the news would be helpful to their campaign.  It is no more a surprise than the fact the sun rose this morning in the east.

The Conservative government has been criticized (including by the Parliamentary Budget Office) for its routine practice of underspending Parliament-approved budgets in many departments, and approved but unspent allocations were a significant factor in today’s announced surplus.  Lapsed funds totaled $8.7 billion in fiscal 2014-15, higher than expected in the budget, and continuing a trend of higher-than-normal lapses.  The short financial summary from Finance Canada does not provide details on which departments accounted for the biggest amounts of lapsed funds.  In the past substantial lapsed funds were booked in departments such as including veterans’ affairs, youth job-creation, and security.  We won’t know until the release of detailed public accounts how much was underspent in each area.

Another factor which can affect a small balance (up or down) is the timing of various revenues and expenses, and the treatment of accounting issues like depreciation of public capital.  Here, too, we do not have enough information from this summary report to know if timing decisions affected the balance one way or the other.  We should note that the government’s net debt rose by $4.7 billion during the year, and it had a net financial requirement (to fund operations) of $2.7 billion.  In other words, the government was still borrowing money, even though it declared a (paper) surplus.  This difference can arise because of accounting treatment of fixed assets, etc., which reduce the apparent deficit even though the government still needs to borrow.  The directional gap between a positive surplus and continued cash borrowing, suggests that these timing issues were likely important to the achievement of the “official” surplus – but again we won’t be able to tell for sure until the full public accounts are released.

We can be sure, however, that surplus funds siphoned from the Employment Insurance system account for more than the entire $1.9 billion surplus for the federal budget as a whole.  EI revenues exceeded EI expenses by $4.5 billion for 2014-15, according to the Finance Canada summary.  That means that for every $1 in bottom-line surplus declared by the government, $2.38 was reallocated away from the EI system.  The EI surplus arises because benefit eligibility has been tightened so aggressively, and most unemployed Canadians can no longer qualify for benefits.  (At present, under 40% of officially unemployed Canadians qualify for regular EI benefits.)  Yet Canadian workers (and their employers) still pay into the system.  The resulting surplus becomes a convenient slush fund for subsidizing other government fiscal priorities – in this case, declaring victory over the deficit in the middle of an election.  Without this transfer from the EI program, the federal government (excluding EI) would have recorded a $2.6 billion deficit (approximately equal to what the government originally predicted for the year).

While the existence or disappearance of a small deficit is economically irrelevant, the means by which the budget was balanced is important.  In the Conservative government’s case, this was accomplished through a sustained, premature, and damaging fiscal tightening that began shortly after the government received its majority mandate in 2011.  Since then, discretionary federal spending has been reduced through announced cutbacks that now cumulate to close to $15 billion per year (three-quarters of a percent of GDP).  David MacDonald and Kayle Hatt have documented these cutbacks in their CCPA report At What Cost?  Meanwhile, employment in the broader federal public service has been cut since mid-2011 by close to 50,000 positions.  Real, crucial public services have been damaged by this austerity: services ranging from Coast Guard bases to veterans’ offices to Statistics Canada to food and railway safety inspections.  Moreover, this austerity undermined Canadian growth and job-creation, leaving the macroeconomy already-weak when oil prices turned down.  In this regard, the Conservatives’ unnecessary austerity absolutely contributed to the recession which Canada experienced in the first half of this year.

In sum, the small surplus for 2014-15 does not represent a “triumph of good fiscal management.”  To the contrary, it represents the extent to which Canadian economic policy has been subverted to short-term political calculus.