Morneau’s forecast of decreased spending on government operations raises questions over deficit projections

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This week’s fall economic update includes projections that Ottawa will spend billions less on operating expenses, a claim that is drawing skepticism from a team of economists, who doubt those savings will materialize.

While Conservatives attacked the Liberals this week as reckless spenders, details of the government’s fiscal plan indicate that it expects spending on staffing and other basic costs of running federal departments and agencies to fall as interest rates rise.

The update said federal operating expenses will decline from $100.3-billion this year to $96-billion in 2019-20 – an election year – and drop further to $95-billion in 2020-21.

The broader category of total program expenses – which also includes transfers to individuals and other levels of government - is forecast to rise to $370.8-billion from $320.2-billion over the next five years. However, the Liberals expect the economy to grow, so that increase would represent a spending cut when measured as a percentage of gross domestic product, dropping from 14.4 per cent in 2018-19 to 13.8 per cent in 2023-24.

Randall Bartlett, chief economist with the University of Ottawa’s Institute of Fiscal Studies and Democracy, said the government has failed to fully explain how it will achieve the planned spending reductions.

“To me, it’s hard to believe," he said. “They seem to be low-balling the operating expense forecast, and being overly optimistic and padding the revenue forecast, and that’s how they’re finding all of this room to provide all these measures... We think the deficits are going to be larger.”

The institute, led by former Parliamentary budget officer Kevin Page, analyzes departmental spending reports to produce estimates on the direction of federal finances. It has been forecasting deficits that are larger than those projected by the finance department or the current Parliamentary Budget Officer, Yves Giroux.

Wednesday’s update said the federal deficit will be $18.1-billion in 2018-19, $19.6-billion in 2019-20 and $18.1-billion in 2020-21, before declining over the next three years.

The update did not say when the deficit will be erased.

A section of the update said the government will save on operating expenses because interest rates are projected to be higher over the long-term, reducing liabilities for employee benefits.

Finance department spokesperson Jack Aubry said changes in expectations for interest rates can make a big difference to the government’s staffing costs.

“With interest rates projected to rise each year over the forecast horizon, the estimated value of that liability diminishes, and this shows up as a reduction in operating expenses. Given that these contingent pension liabilities are large, the impact is significant,” he said in an e-mail.

The government’s Nov. 21 update announced new tax incentives for businesses worth $14.4-billion in foregone revenue over six fiscal years. The tax breaks will allow companies in Canada to write off expenses more quickly when they invest in equipment, and are similar to measures introduced this year in the United States.

The new tax breaks are in response to concerns that the U.S. measures made Canada less attractive for business investment.

The United States also cut corporate and personal tax rates, but Mr. Morneau said this week that matching all of the U.S. tax cuts would be irresponsible.

“We believe we took an appropriate and balanced approach that allows us to be fiscally responsible at the same time,” Mr. Morneau told reporters on Thursday morning.

The update also accounted for $15.4-billion over six years in spending announcements that Ottawa has made since the release of its February budget.

Craig Alexander, chief economist with Deloitte Canada, said the government is correct in saying that higher interest rates will reduce long-term personnel costs. However, Mr. Alexander said he was not in a position to comment on the accuracy of forecasts for operational spending because he does not study departmental reports as closely as Mr. Bartlett does.

Mr. Alexander did say that the projections announced on Wednesday do not leave the federal Liberals much room for a big-spending pre-election budget in 2019, especially if the economy under-performs expectations.

“What the government is probably hoping for is that revenue growth will come in stronger than anticipated, expenditures won’t be quite so high, and as a consequence, they’ll have more fiscal room in the spring to make new announcements," he said. “But if the economy slows, I think they’re going to lose fiscal room to manoeuvre without running an even bigger deficit.”