Budget surplus good news, but doesn’t predict the future: economists

The federal government posted a small budget surplus of $1.9 billion in the fiscal year ending in March 2015, but that doesn’t necessarily mean the economy has improved or that future budgets will be balanced, economists say.

And budget numbers indicate $1.6 billion of that came from government departments spending less than projected – something the feds have been criticized for in the past.

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“To some extent, this is looking in the rear-view mirror,” said Doug Porter, chief economist of the BMO Financial Group. “It’s good news, no question about it, but it doesn’t tell us a whole lot about what’s ahead.”

And things have changed since March, said RBC Economics economist Laura Cooper.

“As we saw in the real GDP growth numbers for the first half of the year, we did see a slight contraction in economic activity.”

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So how did a surplus come about? According to the Department of Finance, there were higher-than-expected revenues from personal and corporate income taxes, lower-than-expected departmental spending and low interest rates.

Former parliamentary budget officer and current University of Ottawa research chair Kevin Page noted some of the surplus is thanks to departments not spending their entire budgets.

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According to the Department of Finance, direct program expenses decreased by $1.6 billion in 2014-15. This report doesn’t provide enough information to determine which departments cut back but it provides a question for future governments, he said.

“I think the new government when they come in, they’re going to have to say, ‘Is that sustainable?’ [Does it] still maintain service levels?”

“It will be an interesting transition discussion for a new government.”

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The government has also benefitted significantly from low interest rates, Page said, as small changes in the rate can make a big difference when you’re talking about hundreds of billions of dollars of debt.

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“You look at those six years of deficits offset by a few years of surpluses. The Conservative government has added about $130 billion of debt to that accumulated deficit. And yet if you look at public debt interest charges, the debt on the credit card, they have actually gone down,” he said.

“That’s really because we’ve had these unbelievably low interest rates. Even though we’ve added on like 25 per cent of the stock of the debt, $130 billion, our interest costs even in nominal dollar terms have actually dropped. So that has really helped the government in terms of dealing with the higher debt and having this positive balance.”

According to Statistics Canada, the GDP shrank by 0.8 per cent in the first quarter of 2015 and 0.5 per cent in the second quarter – a recession, but many say that the fairly steady unemployment rate means that it’s not much of a recession.

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“I still to this day think that the talk of recession is overdone,” said Porter.

This budgetary surplus slightly increases the chances of also having a surplus next year, he said, “but there are also other huge forces at play, whether it’s oil prices or even some of the spending promises that have been made can also affect this year’s balance.”

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“Overall at this stage, it’s a little bit too early to tell what the impact on the overall budget projections for this year and outward will be. But it is overall a positive improvement, this stronger-than-expected performance in that last fiscal year,” Cooper said.

Higher revenue from income taxes could indicate stronger wage growth and a stronger economy, Cooper said.

And even though the federal government balanced the books a year earlier than it projected in its budget, these numbers weren’t really a surprise to everyone. The parliamentary budget officer projected a surplus of $1.8 billion – only $100 million lower than the actual result – in a statement to the House of Commons Standing Committee on Finance in April.

These results, the Annual Financial Report, were also released much earlier than usual – at a crucial time in the election campaign. Since 2011, the earliest the report was ever released was Oct. 5, the latest Oct. 22.


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