Economic downturn has cost Federal coffers more than $18 Billion
While the government of |Canada is posting a small surplus for 2015-16, the weaker economic outlook has taken a substantial toll on the government’s outlook for revenues. Consequently, the government has been forced to raid the contingency reserve and sell its shares in General Motors in order to balance its books. Without these two measures, the government would have produced a deficit of $1.2 billion this year and a surplus of just $800 million in 2016–17, leaving essentially no money for new measures.
The rapid decline in oil prices and the resulting slowdown in economic growth has hit government revenues hard. Lower projections for GDP have resulted in lower estimates for tax revenues, while lower projections for interest rates reduce the expected returns on interest-bearing assets. The weakness in tax revenues will be partially offset by proceeds from asset sales (mostly from the sale of the government’s remaining shares in General Motors), which will boost total revenues by $2.2 billion in 2015–16. Even with the asset sales, federal government revenues are expected to be $6 billion lower in 2015–16 than had been projected in the September Economic and Fiscal Update and an average of $6.6 billion lower per year over the 2016–17 to 2019–20 period.
On the expenditure side, weaker economic conditions have resulted in some savings, but not enough to offset the decline in revenues. Transfers to persons are expected to see slower growth than projected earlier, thanks to a lower outlook for inflation. The government has also lowered its projection for spending on elderly benefits due to a lower projection of the number of recipients. Compared with the fall update, program expenses will be $900 million lower this year and an average of $200 million lower each year over the next four fiscal years. However, thanks to lower interest rates, bigger savings are expected in public debt charges, which are expected to come in $3 billion lower in 2015–16 and an average of $3.7 billion lower per year from fiscal 2016–17 to 2019–20.
To create additional fiscal room for new measures, the government plans to save $1.5 billion over the next five years by reducing the number of eligible sick days for federal employees. The government also expects to generate an additional $1.9 billion over the next five years by getting tough with tax cheaters..
The savings and revenue moves have allowed the government to increase program spending by $13 billion in new measures over the next five years while maintaining a small surplus. After a deficit of $2 billion in 2014–15, the government expects to post a surplus of $1.4 billion this year. The government will then maintain a small but growing surplus, averaging just $2.9 billion per year over the 2016–17 to 2019–20 period. The projected accumulated surplus is now $18.1 billion lower than what the government was forecasting in its update of last fall. Breaking it down, $13 billion is lost to such economic factors as lower growth and interest rates, and $12 billion will go to the new budget measures, while the government will gain $7 billion by reducing the contingency fund over the next few years. While the Conference Board’s outlook for nominal GDP growth is roughly in line with the government’s forecast, the latest budget leaves little room to absorb any potential future economic shocks.