Challenges of the upcoming federal budget
If one thing is already clear, it is that federal Finance Minister Jim Flaherty is about to deliver a tick-tock budget for 2013-14.
The combined deficit of the federal and provincial governments now sits at $45.8 billion, about $6 billion more than was anticipated at the time of the 2012 budget.
With the prospects for domestic economic growth in 2013 now downgraded to around 1.5 per cent from two per cent in the fall and 2.4 per cent a year ago — as well as various other economic sinkholes such as slower tax revenues to contend with — the Tory government is racing against the clock. It has, after all, committed to balance the federal budget by 2015.
By no coincidence whatsoever, it happens that 2015 is the year of the next federal election. That means that next year’s budget will already be a pre-election document, making this one a last shot at resolving some of the toughest issues — including a federal deficit that’s estimated to stand at around $20 billion.
For a government that has built its brand on a record of fiscal prudence, balancing the budget is especially important.
Furthermore, in the last election, Prime Minister Stephen Harper promised to introduce partial income-splitting for tax purposes and to double the popular tax savings program. But only once the budget is balanced.
Growth — or lack of it — is certainly a primary challenge to balancing Canada’s books. Last year, the economy grew by 1.8 per cent, down from 2.6 per cent in 2011.
But one other critical factor that gets a little less attention has been the cost of Canada’s debt. Consumers are by no means the only ones with a close eye on the Bank of Canada’s interest rate policy: governments have tremendous leverage as well. Interest rates are lower than they were before the 2008 crisis, but federal and provincial governments now collectively spend $60 billion to cover the cost of their borrowing.
That said, according to an analysis done by CIBC economist Warren Lovely, interest charges consume about 70 per cent less revenue than they did 20 years ago — the last time there was a serious federal debt/deficit issue.
Furthermore, Canada’s relatively solid economic situation, has resulted in a Triple A debt rating which also allows it to borrow more at lower long-term rates. If rates rise according to current projections, though, it could mean another $15 billion over the next five years.
In other words, the tick-tock factor is especially acute as the elbow room starts to get squeezed over time.
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