An analysis of 2012 Canadian federal government budget
The fiscal plan in Budget 2012 is similar to the last budget in thrust and main themes.
Federal debt should be on the decline by 2015-16
New measures were announced to address long term demographic issues and entitlement spending. Long term economic development measures to expand trade into Asian markets and to facilitate resource development were emphasized. The federal government’s fiscal situation is one of a deficit turning to a surplus and for debt to decline later in the five year fiscal plan.
Last year’s budget exceeded expectations and a similar outperformance is likely for Budget 2012. This fiscal plan’s revenue projections are conservative and department spending reductions contribute to expense control with a surplus probably emerging one year earlier than in the fiscal plan, with debt coming in lower as well.
The spending plan in inflation-adjusted dollars will have a slight contractionary impact on the economy in the first three years of the plan. However, longer term growth will be enhanced through increased trade and resource development opportunities.
Fiscal Plan
The budget deficit is projected at $24.9 billion in the current fiscal year, down from $33.4 billion in the previous year. The deficit declines by about $4 billion next year and $10 billion in the following two years until a surplus emerges in 2015-16.
The federal debt rises each year, reaching a high of $613.9 billion in 2014-15 before declining when the surplus is applied to paying down the debt. In relation to the size of the economy, debt-to-GDP peaks at 34.4 per cent in 2012-13.
Revenue growth is projected to slow to 2.8 per cent in 2012-13 from 4.6 per cent in 2011-12. Budget 2012 has a 6.0 per cent revenue increase in 2013-14, slowing each following year to 4.2 per cent in the last year of the plan.
Spending growth is below revenue in each year of the plan and below the rate of inflation except in the last two years on the plan. In the first three years of this plan, federal spending is slightly contractionary for the economy.
Actual results for 2010-11 outperformed Budget 2011 projections on slightly higher revenue but a more substantial reduction in planned spending. The net result is a deficit $7.1 billion below that fiscal plan.
There is a high probability a similar outperformance for this fiscal plan in 2012-13. The multi-year fiscal plan in this budget is similar to Budget 2011. A surplus emerges in 2015-16 and the federal debt is within $1 billion. As in the last budget, the negligible deficit in 2014-15 could easily turn into a surplus.
Economic Forecast
In what is standard practice, Budget 2012 uses a more conservative economic growth or nominal GDP projection than the consensus or private sector forecast survey. This lowers the level of nominal GDP by $20 billion annually in a onetime shift. The growth in nominal GDP is roughly at the same rate as the private sector forecasts through to 2016, with the exception of 2012.
The effect of the lower nominal GDP growth forecast could amount to a $3 billion revenue gain in 2012-13 while the impact on expenses is somewhat ambiguous but possibly a small increase. On net, the deficit could be below $19 billion and lower actual nominal GDP comes in above the private sector forecast average.
Budget 2012 contains a buffer of $3 billion in each year of the fiscal plan. The private sector average and the Budget’s economic growth forecasts will likely prove conservative.
Revenue
While total revenue growth averages 4.7 per cent annually in the five-year plan, there is a wide variation from a low of 2.8 per cent in 2012-13 to a high of 6.0 per cent in 2013-14.
Personal income tax revenue rises faster than total revenue while corporate tax revenue rises less than the total. GST revenue is projected to increase 5.1 per cent annually. Employment Insurance premium revenues rise since the premium rate is projected to increase by five cents per year until 2015 to reach $1.98 per $100 of insurable earnings and then decrease to $1.95 in 2016. A cumulative balance in the EI Operating Account is projected for 2016-17.
Expenses
Total program spending grows at a modestly faster annual pace during the first four years of the plan following a slight 1 per cent rise in 2011-12. Program spending declined 2.1 per cent in 2010-11.
Spending restraint falls almost entirely on direct program expenses while growing transfers to persons and to other governments. For example, the average annual increase in total program spending is 2.1 per cent with direct program expenses contracting 0.1 per cent, transfers to person rising 4.2 per cent and transfers to other governments 3.8 per cent. A review of program spending and government department activities amounts to projected savings of about $20 billion between 2011-12 and 2016-17.
Savings from tax fairness or closing tax loopholes measures adds another $1.8 billion. The impact of the strategic and operating reviews is evident in the direct program expense projections in the fiscal plan.
Budget 2012 provides spending reductions by department during the next three years. In percentage terms, the largest cuts occur in Finance (mainly to eliminating the penny coin) at 16.8 per cent, the Privy Council at 11.9 per cent, Transport and Treasury Board at 10.7 per cent, and Agriculture and Agri-Food, Natural Resources, Public Service Commission, and Shared Services Canada at 10 per cent. In dollar terms, National Defence tops the list at $1.1 billion, Public Safety at $0.7 billion, and $0.4 billion in International Assistance Envelope.
Few details on these departmental spending reductions were provided and will come out later in the budget process. Department reductions are weighted so that about 40 per cent of the cuts occur in 2014-15.
Job cuts were announced totaling 19,200 positions in the federal public sector jobs cut over three years. About 12,000 workers will be eliminated through attrition coming from retirement and other voluntary departures. A large proportion of full-time-equivalent reductions will occur in the National Capital Region.
Federal Debt
The federal debt as measured by the accumulated deficit (net debt less net non-financial asset values) climbs each year reaching a high of $613.9 billion in 2014-15 before declining when the surplus is applied to paying down the debt. Debt-to- GDP rises fractionally to 33.9 per cent in 2012-13 and compares favourably to the modern day all-time high of 68.4 per cent set in 1995-96.
Significant Measures
In addition to the strategic review of department spending, several measures were proposed impacting the economy and taxpayers.
• Age of eligibility for Old Age Security rises to 67 from 65 starting in 2023. This does not affect anyone 54 or older as of March 31, 2012.
• One review for major resource development projects, capped at 24 months, including current projects like the Northern Gateway pipeline.
• Plan to make major investments of over $1 billion to support science and technology, including:
• $400 million to increase private sector investments and support creation of large-scale venture capital funds; $110 million per year to the National Research Council to double support to companies through the Industrial Research Assistance Program; $105 million over two years to support forestry innovation and market development.
• Extend hiring credit for small business for one year to attract more workers.
• Plan to provide $275 million over three years to support First Nations education and build and renovate schools.
• The Scientific Research and Experimental Development tax incentive program will be streamlined.
• $400 million to help increase private sector investments in early-stage risk capital, and to support the creation of large-scale venture capital funds led by the private sector.
• $100 million to the Business Development Bank of Canada to support its venture capital activities.
• $110 million per year to the National Research Council to double support to companies through the Industrial Research Assistance Program.
• $14 million over two years to double the Industrial Research and Development Internship program.
• $105 million over two years to support forestry innovation and market development. • $500 million over five-years, starting in 2014–15, to the Canada Foundation for Innovation to support advanced research infrastructure.
• Support for junior mineral exploration by extending the temporary 15-per-cent Mineral Exploration Tax Credit for flow-through share investors for an additional year.
• Pursuing new international trade and investment relationship
Measures aimed at financial services industry:
• Introducing legislative amendments to support central clearing of standardized over-the-counter derivative transactions, and to reinforce Canada’s financial stability framework.
• Enhancements to the governance and oversight framework for Canada Mortgage and Housing Corporation.
• Develop a legislative framework for covered bonds. The covered bond program will be available to federally and provincially regulated mortgage lenders in Canada and administered by CMHC.
Category: Canada
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