Tuesday , November 24 2020

Mourneu's forecast to cut spending on government operations raises questions about deficit forecasts

Finance Minister Bill Morneo spoke to reporters in Ottawa, ON, on Thursday, 22 November 2018

Sean Kilpatrick / Canadian Press

This economic update this week includes predictions that Ottawa will spend billions less on operating costs, which claims skepticism from a team of economists who doubt that these savings will materialize.

While conservatives have attacked liberals this week as reckless spending, details of the government's fiscal plan show that staff costs and other key management costs for federal agencies and agencies are expected to decline as interest rates rise.

The update indicates that federal operating expenses will fall from $ 100.3 billion this year to $ 96 billion in 2019-20, an election year, and will fall further to $ 95 billion in 2020-21.

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The larger category of total program spending – including transfers for individuals and other levels of government – is expected to grow to $ 370.8 billion from $ 320.2 billion over the next five years. The liberals, however, expect growth in the economy, so that the increase is a reduction in expenditure, measured as a percentage of gross domestic product, falling from 14.4 per cent in 2018-19 to 13.8 per cent in 2023-24.

Randall Bartlett, chief economist at the Institute of Fiscal Research and Democracy at the University of Ottawa, said the government had failed to fully explain how the planned cost reductions would be achieved.

"It's hard for me to believe," he said. "They appear to be low with an outlook for operating costs, being too optimistic and ranking the earnings forecast, and so they find the whole room to provide all these measures … We think the deficit will be bigger."

The institute, led by former member of the parliamentary budget, Kevin Countries, analyzes the departments' estimates for forecasting the direction of federal finance. He predicts deficits that are higher than those projected by the finance department or current Parliamentary Budget Director Iv Giro.

The update on Wednesday announced that the federal deficit would be $ 18.1 billion in 2018-19, $ 19.6 billion in 2019-20, and $ 18.1 billion in 2020-21, before declining over the next three years.

The update did not tell when the deficit would be deleted.

Part of the update says the government will save on operating costs, as the interest rate is expected to be higher in the long run, reducing employee benefits liabilities.

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Financial Department spokesman Jack Aubrey said the change in interest rate expectations could make a big difference in government spending.

"With the projected interest rates, which increase each year over the forecast horizon, the estimated value of this liability decreases and this is reflected in a reduction in operating costs." Given that these contingent pension liabilities are large, the impact is significant, "he said by e-mail.

The government update, published on November 21, announced new tax incentives for businesses worth $ 14.4 billion in revenue lost over six financial years. Tax benefits will allow companies in Canada to cut costs faster when investing in equipment and are similar to the measures introduced this year in the United States.

New tax cuts respond to fears that US measures have made Canada less attractive for business investment.

The United States has also reduced corporate and personal tax rates, but Mr Morneau said this week that combining all tax cuts in the United States would be irresponsible.

"We believe we have an appropriate and balanced approach that allows us to be fiscally responsible at the same time," Mr Morneau told reporters on Thursday morning.

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The update also reported $ 15.4 billion for six years in the cost statements that Ottawa made following the release of its February budget.

Craig Alexander, chief economist at Deloitte Canada, said the government rightly said that higher interest rates would reduce long-term staff costs. However, Mr. Alexander said he was not in a position to comment on the accuracy of the operating estimates because he was not examining department reports as close as Mr. Bartlett.

Mr Alexander said the forecasts announced on Wednesday did not leave federal liberals much room for a large budget before the 2019 elections, especially if the economy is not meeting expectations.

"What the government may hope is that revenue growth will be stronger than expected, spending will not be so high and as a result will have more fiscal space in the spring to make new messages, says he said. "But if the economy slows down, I think they will lose their fiscal room to maneuver without ever reaching a bigger deficit."

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