Federal surplus: the fine print

At budget time this year, Stephen Harper delivered a Paul Martin budget, with more spending than tax cuts. With the release of the Annual Financial Report and Fiscal Reference Tables for 2006/07, we see even more of old blue eyes. Back when this budget was tabled, the projected surplus (mostly earmarked for debt reduction) was $3.6 billion. A year later, at the time of the 2007 budget, that number grew to $9.2 billion. And today it was revealed that the surplus was $13.8 billion (a new accounting rule makes it $14.2 billion, as some media have reported).

This is a lot of money, about 1.0% of GDP. As in years past it means that social and environmental priorities, like fighting poverty and homelessness, or meeting the challenge of climate change, have been left off the table by deliberate understatement of available surpluses. Even if you accept that this was a “surprise” there is no reason why that money (perhaps with the exception of the $3 billion committed to debt reduction in the original budget) could not be put into a fund for capital projects (social housing or transportation infrastructure, perhaps) or even into a fund that would support future operating expenditures (for, say, early learning programs).

The fiscal reference tables provide some interesting comparisons over the years. Program spending was 13.0% of GDP in 2006/07, up from the all-time low hit in 1999/2000 and 2000/01, but still well below levels seen over the post-WW2 period. In the 1960s and 1970s, program expenditures ranged from 15-18% of GDP. Even the 13% in 2006/07 is an overstatement due to an accounting charge of $2.8 billion (reflecting bad debts on the accounts receivable front and one-time costs associated with a change to public service pensions). Take out this adjustment, which exists only on the books, and the 7.5% increase in program spending that so offends corporate Canada is actually a 5.8% gain. And it also would make the underlying surplus closer to $17 billion.

It is also worth noting that the Conservatives were actually well under budget on expenditures, by about $5 billion, during the fiscal year, which provided the room to finance $4 billion of expenditures announced in the 2007 budget by billing it to the 2006/07 fiscal year. Only this late surge made expenditures come close to what was originally budgeted.

The other story is on the revenue side – a large (19%) increase in corporate income tax revenues. As we know, corporate profits have been booming in recent years, but this has not translated into substantially larger tax revenues because companies can write off prior year losses against current profits. It appears that those losses have now disappeared, so corporate Canada has had to cut a larger cheque to Ottawa.