Federal Budget 2016-2017 Thoughts

There's not a lot I can say that hasn't been said by people who follow the federal budgets closer than I. This Stephen Gordon piece in Maclean's is good.

I would say that this follows the playbook of the Ontario Liberals, which isn't surprising when Trudeau's closest advisers (Katie Telford and Gerald Butts) are former Ontario Liberal advisers. Spend a lot, say it will bring growth and the growth doesn't materialize. Most of the spending doesn't seem like it will cause productivity growth and some of the social spending looks like it will encourage people to work less. People need to remember people respond to incentives.

When pundits say Canadians are OK with near 30 billion dollar budgets, I don't think they are totally wrong, however approximately 60% of Canadians voted for balanced budgets.

Finally the federal Liberals are also borrowing from the provincial playbook where they predict a colossal deficit and then claim they succeeded after they slightly beat that target. Or don't when GDP growth doesn't materialize sufficiently. Or a global slowdown occurs, which doesn't seem unlikely over Trudeau's term.

Ontario 2015-2016 Budget Predicts 2015 GDP Growth of 2.7%, Will We Reach It?

I just wanted to highlight the Ontario Finance ministry's prediction for Ontario's GDP growth for 2015 contained in the 2015-2016 budget PDF, on page 233. For 2015 the prediction is 2.7% (annualized) followed by 2.2% for 2016, 2017 and 2018.

Considering that the first estimate of US GDP growth just came out this week at a very weak 0.2% and the fact that Ontario and US GDP growth are quite correlated, and that the Atlanta Fed GDPNow model for US GDP growth is predicting US growth of only 0.8% in the second quarter of 2015 as of May 1st, I'm going to go out on a very thick limb and predict that Ontario won't reach GDP growth of 2.7% in 2015. The Atlanta Fed GDPNow model was dead on for its prediction of first quarter growth so I'm inclined to go with their prediction.

If Ontario also has GDP growth of 0.2% in the first quarter, growth would have to average 3.5% in the other three quarters which seems unlikely. Incredibly, there's a RBC prediction of Ontario GDP growth of 3.3% made in March, which now seems incredibly unlikely.

If the AtlantaFed model is correct for US second quarter GDP growth at 0.8% and Ontario's is similar, that would require third and fourth quarter growth of an average of 4.9% which again seems unlikely. So be prepared for revisions for the Ontario's GDP growth in 2015 and following that, less than predicted revenues to the Ontario government. On page 265 of the budget PDF, Ontario is predicting revenue of $124.4 billion in 2015-2016.

Livio di Matteo: "Ontario Can't Balance Its Budget"

Lakehead University's Livio di Matteo has a great article on the Ontario deficit which is well worth reading. Considering the claim by the Liberal Ontario government that the provincial budge will be balanced by 2017-2018, Matteo goes through what the latest Ontario budget numbers are:

"According to the review, between 2013-14 and 2017-18, total expenditures (including the reserve) are expected to rise from $126.4 to $134.5 billion - an increase of 6.4 per cent. Meanwhile, revenues are expected to rise from $115.9 to $134.5 billion - an increase of 16 per cent.

For Ontario, the heavy lifting needed to balance the budget was obviously expected to come from the revenue side, with expenditure restraint playing a minor role. Over a four-year period, this translates into average annual expenditure and revenue growth of about 1.6 and 4 per cent respectively. These figures can also help us assess the performance to date. Between the actual results for 2013-14 and the current outlook for 2014-15, are expenditures up by 1.6 per cent or less? Are revenues up by 4 per cent or more?"

Those are some interesting numbers and considering recent government actions and economic numbers it is good that someone has taken the trouble to look at the up to date numbers:

"Let’s look at the spending picture first. Despite some savings that have apparently been found in terms of program review and year-end savings totalling about $1.3 billion, total expenditures are still up by 3 per cent - rising from $126.4 to $130.2 billion. If spending continues to grow at 3 per cent, it will reach $142 billion dollars by 2017-18, substantially above the current budget plan.

Spending has grown at about double the rate needed for Ontario to be on track to meet its deficit target. Across the vast pantheon of ministry expenditure categories, only three have seen a decline - Tourism, Culture and Sport (-7.6 per cent), Natural Resources (-0.9 per cent) and the Attorney General (-2.1 per cent). The remainder all grew, with rates ranging from a low of 0.6 per cent for Citizenship and Immigration to a high of 83.9 per cent for Infrastructure. Even the Ministry of Government Services will see an increase from $728 million to just over $1 billion in spending — an increase of 31 per cent!

Of course, the key categories are the big-ticket items of Health, Education and Social Services, which together account for two-thirds of provincial government spending. Over the course of a year, Health grew at 2.3 per cent, Education at 5.1 per cent and Social Services at 7.9 per cent. On the expenditure side, it would appear the first year of moving towards a balanced budget by 2017-18 has missed the expenditure growth target by a fair amount."

I think the most salient information here is that the big ticket Health and Education budgets have increased a lot compared to what is required to balance the budget. Although I am impressed that Health only increased by 2.3%. I think it is a little odd that Education increased by so much. Perhaps that has something to do with the rollout of full day junior kindergarten. On the revenue side things aren't looking great either:

"How about revenues? Between 2013-14 and 2014-15, total revenues rose from $115.9 billion to $118.4 billion - an increase of only 2.1 per cent. Overall, revenues have grown at about half the average rate Ontario needs to meets its goal of a balanced budget by 2017-18."

I'll be curious to see what the final numbers are on the 2014-2015 deficit. The province has a pretty big reserve baked in, so perhaps they can claim that they made their numbers, but with these big spending increases things aren't looking good. Maybe they will include the recent GM share sale proceeds into the budget as revenue.

The 2015-2016 budget isn't looking great either. Don't expect the Toronto Star or Martin Regg Cohn to point out these numbers

Ontario Finance Minister Sousa: Ontario's GDP Growth Next 20 Years Sucky, Deficit Slightly Down?

Ontario Finance minsiter Charles Sousa (any relation to John Philip?) spoke today about Ontario's finances. The Star has a recount of the event here. Noteworthy was this:

"It cites an aging population and slower expansion of the workforce, which “may restrain future economic growth in the absence of significant productivity improvements.”

“The report indicates the need for consistency, predictability and steady hands,” said Sousa, who is to table a budget in May that could trigger a June election.

The economic outlook calls for an average of 2.1 per cent annual growth in real GDP through 2035."

As I've previously posted, I'm shocked that anyone is shocked that Ontario is going to have low GDP growth in the future. Historically, Ontario hasn't had good GDP growth since the Harris years and this prediction is more of the same. I was a little surprised by this quote:

"Despite a growth prediction that barely exceeds inflation, Sousa maintained that the provincial budget will be balanced by 2017-18.

He is to deliver a revised deficit figure on Thursday that will be slightly lower than the $11.7 billion forecast."

Getting to zero deficit by 2017-2018 to me seems very difficult at this point in time, with stagnant GDP growth and rising health costs. Sousa most likely isn't going to be around for that budget so I guess he can say what he wants. I'm assuming that the $11.7 deficit figure refers to the fiscal year that just finished a couple of days ago. I'm a little surprised it doesn't come in higher than predicted, although lately the provincial government has been giving worse predictions for the budget and then beating them slightly, which would appear to be the case here. 

This finance ministry document has some relevant data which shouldn't disappear into the memory hole. The 2012-2013 interim deficit was 9.8 billion, with the 2013-2014 deficit estimated at 11.7 billion, with further predictions of 10.1 for the 2014-1015 fiscal year and then predicted deficits of7.2, 3.5 in future years and a surplus of 0.5 billion in the 2017-2018 fiscal year.

One interesting thing about those deficit predictions is that a reserve was introduced in the 2013-2014 fiscal year prediction. For 2013-2014 year the reserve was 1.0 billion with reserves of 1.2, 1.2, 1.5,  and 1.5 in future years. So in actuality the predicted deficit for 2013-2014 is really 10.7 billion. So if the 2013-2014 deficit is announced at more than 10.7 billion it is actually worse than predicted. For 2014-2015 the actual predicted deficit is 8.9 billion, followed by 6.0 billion, 2.0 billion and then a surplus of 2 billion in 2017-2018.

Other data is provided in the finance ministry document. Program spending interim for 2012-2013 is 113 billion, and estimated at 117.0 billion for 2013-2014. Future years have program spending estimates of 118.3, 118.8, 118.8 and 118 billion in 2017-2018. You'll notice that for four years in a row spending is predicted to be flat. That seems incredibly unlikely, especially considering recent spending increases like the OPP's 8.5% pay increase effective January 1st 2014.

Income information is also specified. For 2012-2013 the income was 114.2 billion and then estimated at 116.8 billion for 2013-2014. For following years the income estimates are 120.5, 124.9, 130.1 and 134.4 billion in 2017-2018.  It should be interesting to see what program spending ends up coming in at for 2013-2014 and what the prediction is for 2014-2015.

Ontario Tories Release Documents Showing the Liberals Will Miss Deficit Targets

There's still no sign of a Liberal budget date. I've heard rumours that this budgets numbers wouldn't be good and that the Liberals plan to balance the budget in 2017-2018 would be pretty much impossible to achieve.

Now according to this Globe article, the Tories have released documents stating that:

The Ontario government is set to miss its deficit reduction targets for the next two years and must either dramatically cut spending or hike revenue to make up the shortfall.

That’s the message in a series of internal government documents prepared early last year. The papers, primarily briefing notes written by senior bureaucrats for Premier Kathleen Wynne, were obtained by a legislative committee and released by the Progressive Conservative opposition Monday.

 I can't say I'm very surprised. To meet those budget targets, the Liberals would have had to take some draconian measures. However news like the OPP getting a 8.5% raise on January 1st this year after two years of freezes and various other expenditures means that there's no way those targets can be met (amusingly, the OPP raise will apply to the last three months of the 2013-2014 budget). 

I'm assuming that the Liberals will take their time releasing the 2014-2015 budget but it will be interesting.

Canada's Janurary Employment Numbers Are Out, No Recovery for Ontario from Big December Drop

Statscan has the employment numbers out for January, available here. After a big dive of over 40,000 in December, the country as a whole bounced back with 29,000 jobs.

One thing about the numbers that the media didn't pick up on was that Ontario didn't bounce back at all in January. Although the media in general doesn't seem to care a lot about the individual Ontario numbers. In December Ontario lost a massive 39,000 jobs (which would be the equivalent of losing over 900,000 jobs in a month in the entire US). With the ice storm affecting Southern Ontario in December, conceivably some jobs weren't filled and perhaps they would show up in the January numbers. But they didn't:

"Although employment was little changed in Ontario, the unemployment rate fell 0.4 percentage points to 7.5% as fewer people looked for work. On a year-over-year basis, employment in the province rose by 54,000 or 0.8%, the same growth rate as the national average."

That's not really reassuring although at least Ontario didn't lose jobs two months in a row. The number of jobs increasing by 0.8% over a year isn't that fantastic considering the province's population grows at 1% at year currently (from Wikipedia).

Again the February numbers should be interesting to try and discern a trend. For the provincial treasury, low job growth isn't going to help income tax revenue, so the budget should be interesting to say the least. 

Ontario 2010/2011 Budget Deficit Lower Than Expected

The Star has an article about the Ontario budget deficit situation. Good news that the deficit for the fiscal year ending at the end of March is only 14 billion, lower than expected. I'd be curious to see the breakdown in terms of where the smaller deficit came from? Lower spending or more revenue including more HST revenue.

An ominous quote about this fiscal year's deficit: "But Duncan said in an interview that this fiscal year's deficit is still projected to come in at $16 billion, slightly higher than the actual figure for last year."

Considering that the first quarter of this fiscal year (this past April to June period) is looking weak, judging by the federal number and the fact that the US is looking especially weak going forward (which is more important for Ontario than for other provinces), could Ontario's deficit go up? Very possible, although with the election, whoever wins will have a bit of control over it, but not much. If Hudak wins, expect him to stuff whatever he can in this year's budget to make subsequent budget deficits look better.