This week the media was filled with exclamation marks about the fact that the Department of Finance in its Annual financial Report reported a budgetary surplus of $ 1.9 billion rather than the budgeted deficit that had been expected for the fiscal year 2014 /2015.
Bear in mind that this is a small surplus less than 1 % in a budget totalling 0ver 280 billion dollars. For that matter the year before the actual deficit was 5.2 billion again a very small fraction of the total budget. In addition it is worth thinking about what the budgetary surplus would have been if the calculation had been made at the high employment level of 4 % unemployment rather than at the 6.9 % level of unemployment that actually had prevailed. The surplus would have been substantially larger which indicates that the 2015/15 budget may well have had a contractionary impact upon the economy which may have reinforced the negative impact of the fall in world oil prices over the past year.
The Finance department report explains that in 2013/14 Canada exported oil worth 100 billion $ world wide. During the past year the price has fallen substantially so that roughly the same volume of exports has yielded 45 billion $ less in revenue from sales. The GDP fell from a growth rate of 4.9 % in the first three quarters of 2014 to 0.4 % in quarter 4. GDP contracted by 2.9 %in the first quarter of 2015. Interest rates were lower than expected and so debt charges were also lower. In fact the total financing charges for the year fell from 1.5 % of the GDP to 1.3 % or from $28.2 billion to 26.6 billion.
Corporate and personal income tax revenues were 3 billion $ higher than budgeted and program expenses 0.8 billion $ less.
Budgets are always projections of the future. In addition they have a non neutral effect on the economy. If you budget spending on infrastructure and social services directed at the poor and moderate income levels who have a higher propensity to consume you will generate a larger employment multiplier and thereby grow the economy larger and faster than would otherwise be the case if you did not budget and spend the money. You also reshape expectations in a more positive direction. This kind of spending crowds in private investment rather than crowds it out particularly if the central bank keeps interest rates low and runs an accommodating monetary policy.
Finally the report also makes clear that Canada’s debt to GDP ratio is quite low the lowest of the G7 countries at 32.3 % compared with a G7 average of almost 86.8%. Even when we consider all levels of government, the CPP and the QPP the provincial and local levels Canada’s debt to GDP ratio is just 40.4 % . The calculation of the government’s deficit takes into account the value of both financial and non financial assets including the value of real estate and non financial assets although it is not clear from the report whether these valuations are at full market value or comprehensive. So the report is quite useful in helping us to assess the state of the government’s finances on the eve of the election and raises a number of questions about the near future of the Canadian economy. Unemployment has risen, growth has slowed and the first half of the year was in recession. It is premature to celebrate and given the low interest rates that prevail and modest state of overall debt as compared to the GDP it is a good time to invest in repairing our infrastructure and stimulating the economy.