In his fall fiscal update, Finance Minister Jim Flaherty is sticking to his storyline of success. So he should; it’s a good story. And Flaherty remains the government’s best messenger who, among other things, knows how to stay on message.
His narrative is that Canada is first in the G7 in job creation, with the biggest improvement in employment since the recession, more than one million new jobs in the past five years. Canada has the lowest deficit, and lowest debt-to-GDP ratio “by far” in the G7.
He’s equally sticking to his story of balancing the books by 2015, but now forecasting a surplus of $3.7 billion by then, as opposed to a forecast surplus of only $800 million in the budget last March. But the question is, how do we get from a deficit of $17.9 billion to a surplus of $3.7 billion in only two years?
The current deficit includes a one-time charge of $2.8 billion for Alberta flood relief and another $60 million for Lac Mégantic, but that still leaves a deficit of $15 billion, so he needs to find and save nearly $19 billion to make his surplus number.
Flaherty has now staked the government’s reputation, and his own, on hitting this number.
But getting there won’t be easy. The most important paragraph in the 2013 budget was the $28 billion in forgone exports and $4-billion federal revenue shortfall because of the oil and gas discount in selling to the U.S. as opposed to the world price.
Other things for Flaherty to be concerned about include worries in Europe and the U.S. about their economies’ inflation being less than forecast. In terms of growth, the recovery is still fragile.
And in terms of efficiencies, Ottawa will need more than freezing the operating budget, which will save $550 million in the current fiscal year and $1.1 billion in the next one.
One area where federal program spending increases will stabilize over time is in health-care transfers to the provinces.
At the back of the fiscal update is a page called “Trends in Provincial Health Spending.”
It’s noteworthy that annual growth in provincial health spending has come down from 5.5 per cent in 2010, to 4.2 per cent in 2011, to a projected 3.5 per cent in 2013.
This has occurred since Flaherty’s unilateral announcement in Victoria in December 2011, that upon the expiration of the 10-year Health Accord in 2014, health transfers to the provinces would continue to grow by six per cent a year for three years, but in line with the economy after that, with a “floor figure” of three per cent growth.
According to these numbers, the provinces have already made the adjustment down to a 3.5 per cent increase in health spending, and have a surplus of 2.5 per cent.
At the time of the Victoria meeting of finance ministers, the provincial representatives freaked out. They had been expecting a series of federal-provincial meetings on renewing the Health Accord. Instead, they got a press release announcing a fait accompli.
Flaherty certainly put the cat among the pigeons that day.
Assuming Flaherty hits his surplus target of $3.7 billion, Ottawa would have no need of the $3-billion contingency reserve — and so the real surplus number would be $6.7 billion.
Flaherty and Stephen Harper wouldn’t be using much of that to pay down debt, not in an election year. They’d be using most of it for tax cuts and other goodies in the 2015 budget. Middle-class tax cuts, income-splitting and things like that.
Flaherty has the best office on Parliament Hill, and Finance is the strongest department in the government. They don’t do smoke and mirrors.
It’s not by accident that, the day after the update, Standard & Poor’s reaffirmed Canada’s gold-plated Triple-A credit rating.
But getting to a surplus position, given all that can go wrong with economic forecasts that are guarded in their optimism, will not be a walk in the park.
It will take more than good management. It will take good luck, the luck of the Irish, and Flaherty knows a lot about that.
L. Ian MacDonald is editor of Policy magazine.
